Is Title Insurance A Worthy Investment?
Evelyn Hunter wanted to deed a small condominium apartment in Pasadena, Ca., to her grandchildren. Because this property transfer was among relatives, Ms. Hunter didn’t see the need to obtain title insurance, a one-time premium paid to a title company that guarantees that you own a particular piece of property and that no one else has a claim to that property. After all, Ms. Hunter had owned the apartment for 15 years and hadn’t had any problems during that time. Although she wasn’t legally required to purchase a title insurance policy for her grandchildren, Ms. Hunter should have considered doing so. Several years later her granddaughter decided to sell the property and a title search revealed there was a flaw in the chain of title going back before Ms. Hunter had purchased the property. It took over a year and a half with a cost of several thousand dollars in legal fees to resolve the problem. If Ms. Hunter had purchased title insurance for her granddaughter, she would have been covered for any expenses to correct the problem.
Unlike fire or property hazard insurance, which insures against events which could occur in the future, title insurance covers events which have taken place in the past, such as forged documents, incorrect easement descriptions or a lack of legal authority to sign documents. In Mr. Hunter’s situation, there were problems with the former owners that she was not aware of. People often think nothing can go wrong with the title to their property after they have the deed in hand. After all, everything may seem official – the deed has been recorded at the county recorder’s office; an examination of the property shows no visible signs of encroachment or lien problems and walking the property to verify the survey shows no obvious boundary disputes. Perhaps you’ve even searched county records to check for problems and found none. (Note that the risk of doing this search yourself is that you would have to be able to interpret correctly the recorded ownership information that you find). But, if just one judgment or lien against the property has been over-looked, which can happen even when expert title examiners do these searches, it could be very costly and create problems later for an owner.
After seeing an advertisement for a commercial property located in Sebastopol, Ca. Matt and Kristen Stevens decided to make an offer on the property. The modest building, with two retail stores and a small customer parking lot, seemed like an ideal investment. Inexperienced in commercial property and city parking requirements, the Stevens assumed that the parking lot provided adequate spaces for the building. They purchased the property and obtained a polity of title insurance to protect their interests.
What was not readily apparent was that half of the parking spaces were located on an adjoining neighbor’s property, and an easement had been created and described in the Stevens’ deed which gave the Stevens the right to jointly share in the use of this easement. A city ordinance required them to provide a certain number of parking spaces for their tenants. The Stevens were sure they had enough spaces with the half of the parking lot they owned and the half which they shared with their neighbor.
After several months of ownership, the neighbor told them that he really owned part of the parking easement, and this property was included in his deed. The Stevens’ tenants could not use his land for parking for their customers. The Stevens were now in jeopardy of losing the occupancy permit on their building because they could not provide the required number of parking spaces. An error had been made in the boundary description of the easement. The Stevens weren’t sure where to turn for help, so they contacted a lawyer, who suggested they make a claim to the title company which issued their policy of title insurance.
The title company was responsible for investigating the matter and ended up negotiating with the Stevens’ neighbor to resolve the problem. The title company offered to buy the additional parking spaces from the neighbor, adding the land to the Stevens’ deed. The couple now owned the additional spaces and the occupancy permit was valid and the tenants could continue in business. The purchase price for the parking spaces alone well exceeded the cost of the title insurance policy.
What Types of Title Insurance Are Available?
There are two basic types of insurance: an owner’s policy and a lender’s policy. The owner’s policy is normally written for the amount of the purchase price of the property and contains basic coverage, which can be expanded by adding endorsements. An endorsement is additional coverage, which can be added to the title insurance policy to cover specific events. The lender’s policy is written to cover the amount of the loan and contains several items which an owner’s policy does not include. Your lender will require you to obtain both types of title insurance if you are using a mortgage to finance your property purchase.
What Types of Risks Does An Owner’s Policy Cover?
A standard owner’s policy covers such risks as:
- Forgery and impersonation;
- Lack of competency, capacity or legal authority of a party;
- Undisclosed or missing heirs;
- Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner);
- Undisclosed (but recorded) easement or use restriction;
- Missing interpretation of wills;
- Erroneous or inadequate legal descriptions;
- Lack of right of access; and/or
- Deed not properly recorded
What Additional Coverage Does A Lender’s Policy Include?
An expanded lender’s policy will cover:
- Off-recorded matters, such as unrecorded easements;
- Deed to land with building encroaching on land of another;
- Incorrect survey
- Claims to water and mineral rights
- Silent off-record terms (such as mechanics’ or estate-tax liens); and/or
- Pre-existing violations of subdivision laws, zoning ordinances or covenants, conditions, and restrictions.
Lenders often require endorsements to cover such items as violations of the covenants, conditions, and restrictions which limit the use of land and regulation of the type and location of improvements. Lenders may order an endorsement to cover encroachments made by property improvements which may extend onto a neighbor’s property. There are many other endorsements available, each suited to a particular situation or occurrence. After an inspection of your property, the lender will determine which added protections are needed to protect their interest.
What Is The Cost of Title Insurance?
The cost of a title insurance policy varies from state to state, in part because states differ in how much they regulate title insurance fees. Some states, such as Florida, set a minimum title insurance rate, called a “promulgated rate,” in order to establish a base rate that title companies and attorney must charge. Insurance providers in other states, such as California, must file their fees with the state’s insurance commissioner, and once filed, must adhere to those fees.
How Long Does Title Insurance Remain In Effect?
Once written, title insurance remains in effect for as long as you own the property, so it is important to choose wisely when reviewing the coverage afforded by your policy. The cost of title insurance in minimal when you consider the protection it provides. You probably will never have to file a claim, but in the event you do, you will be glad you have this valuable insurance.
Can I Transfer The Title Insurance To A New Owner?
No, title insurance is not transferable or assumable by a new owner to the property. It terminates once legal title changes.
Copyright © 2013 Sandy Gadow. All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.