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A Closer Look at Title Insurance

By Brian Block and Beau Brincefield

“What is this charge for?”
“What does owner’s title insurance insure me against and why should I buy it?”
“Why am I required to purchase lender’s title insurance?”

Many a REALTOR has faced these questions and blank stares from a buyer at a settlement who notices the fees for title insurance on the HUD-1 settlement statement. The settlement table is not the place to start explaining title insurance and non-lawyers are prohibited from giving legal advice on this matter. To avoid a surprised buyer who does not understand what it is that they are purchasing, REALTORS should educate their buyers regarding the basics of title insurance early in the homebuying process. In most cases, REALTORS should suggest that their clients seek the advice of a knowledgeable real estate attorney who can explain more thoroughly the legal aspects of their title insurance coverage and review it with the clients prior to settlement.

Title insurance separately insures a homebuyer and a mortgage lender against losses resulting from covered title defects, whether these defects are known or unknown at the time of the sale or the refinance. Title insurance involves complex legal issues and differs greatly from the types of insurance with which most people are familiar, such as automobile, health care, and life insurance. Casualty insurance such as automobile insurance protects the insured from actions happening in the future. In contrast, title insurance protects the purchaser and homeowner against risks or title defects that exist at the time the policy is issued. Therefore title insurance companies place a great emphasis on risk elimination before insuring against problems that originate before the homebuyer purchases the home. Additionally, the title insurance premium is a one-time fee charged at settlement, unlike other insurance policies that require an ongoing annual premium to insure against future hazards.

There are two basic types of title insurance policies: lender’s and owner’s. A lender’s title insurance policy protects only the mortgage lender and any subsequent lender to whom a loan may be sold. Lenders will require that purchasers pay for lender’s coverage because they want to eliminate the risk of a title defect on property on which they secure loans. Lender’s coverage will normally cover the lender up to face value of the loan. Owner’s coverage is based upon the sales price of the home and will protect the homeowner as long as there may be potential liability for a title defect.

Title insurance is designed to protect lenders and homeowners from the risk of title problems. The following is a partial list of potential title problems: 1. Someone forges a previous owner’s name to a deed and conveys the property to a third party; 2. A properly recorded mortgage lacks a legal description identifying the property subject to the mortgage; 3. A deed is improperly recorded with the wrong legal description; 4. A person in bankruptcy with no authority to sign the deed conveys the property to a third person; 5. A previous seller was unaware of a mechanic’s lien; 6. Forged releases of prior deeds of trust.

The typical title insurance policy will exclude from coverage any problem that has been revealed by the public records and numerous problems that would not be revealed by the public record. Some of the exclusions contained in an owner’s policy may include: laws restricting or relating to the use or occupancy of the property based on environmental protection; defects, liens or adverse claims not known to the insurance company but known to the insured and not disclosed in writing to the company prior to inception of the policy; taking of the property by eminent domain. It is important for the homebuyer to understand the exclusions from coverage and to be informed about the risks that are and are not covered by the title insurance policy. Since REALTORS®, non-lawyer settlement service providers and representatives of title insurance companies are all prohibited by law from giving legal advice to purchasers concerning title insurance, only a knowledgeable real estate attorney can protect your purchasers from accepting less than adequate title insurance coverage. Thus, in order to best protect your clients, encourage them to obtain legal representation to insure maximum protection from the purchase of title insurance.

Brian Block and Beau Brincefield are attorneys with Brincefield, Hartnett & Kahn, P.C. in Old Town Alexandria and members of the NVAR Real Estate Finance Forum. Mr. Block is also a REALTOR with Re/Max Allegiance. Mr. Brincefield is a member of the NVAR Hall of Fame. They can be contacted at 703/836-2880.

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