The provisions of the typical real estate purchase contract that deal with title and title insurance issues are probably the least understood sections of the contract. In point of fact, the percentage of lawyers (including real estate lawyers) who understand the nuances of the laws dealing with title to real property and title insurance is very, very small. Because of the complexity of these subjects, this section of the booklet is divided into two parts. The first part deals with what the homebuyer really needs to know about these issues. The second part will explore title and title insurance issues in a little more detail and provide some additional information which you might find interesting and helpful.
What the Homebuyer Needs to Know. When you buy a home, you want to know that, once you go to settlement on the home, you will really own it and that you will have peaceful and quiet possession of the home. You want to know that your title to the property is good and that no one else is going to come along and assert any claim against the property. Basically, that is what is meant by the phrase “good title”.
Title insurance is a particular kind of insurance which homebuyers purchase with the expectation that, if the title to their property turns out not to be “good” for some reason, the title insurance policy will protect them against any loss.
Title insurance is almost always a good thing for a homeowner to obtain, provided that it covers what it should. Unfortunately, since most homebuyers do not know what to look for in a title insurance policy and because most homeowners do not get adequate representation at settlement, most homebuyers who purchase title insurance actually get a lot less than they think they are getting. It is not until later, when a title problem crops up, that they find out that that particular problem is not covered by their title insurance policy. This is one of the most important areas in which homebuyers need the help of an experienced real estate attorney.
When you buy a home, the lender will require you to provide the lender with a lender’s title insurance policy. Consequently, whether or not you buy owner’s title insurance to protect your interests in the property (and you should), the settlement agent will arrange for a title search to be prepared in advance of settlement. Basically, a title search means an examination of the public records to determine whether they contain any matters which may affect the title to the property you are purchasing. The results of that search are reduced to a written summary called an “abstract of title” (or “title report”). The title insurance company or its agent then reviews that abstract and uses it to prepare the title insurance “commitment” (or “binder”) which is, basically, the company’s promise to issue the title insurance policy at a later date subject to the various conditions described in the title insurance commitment.
Obviously, when the title insurance company issues the commitment, it has already had the benefit of reviewing the abstract of title and it already knows whether or not the title search has revealed any potential title problems. If it has, it is possible for the title insurance company simply to exclude from insurance coverage any of those potential problem items and you will be none the wiser unless and until the problem surfaces, maybe years later.
It is essential for the homebuyer to have his own, independent, knowledgeable real estate attorney to review the abstract of title, the title insurance binder and the final title insurance policy to make certain that, if any problems have been uncovered in the title search, they have either been dealt with and resolved before settlement or they are covered in your final title insurance policy.
One more thing you should know about title insurance: Early on in the negotiations for purchasing the home, try to find out whether the seller purchased or refinanced the home within the last ten years. If so, try to find out whether or not the owner bought owner’s title insurance when he purchased or last refinanced. If the answers to both of those questions are “yes”, you can go back to the same title insurance company and get a substantial premium reduction (called a “reissue rate”) on the title insurance policy you buy when you settle on the home.
Additional Information You Might Want to Know About Real Estate Titles and Title Insurance. There is a lot of terminology to master in order to understand a discussion of title and title insurance issues. In the first place, a properly drafted real estate purchase contract should require the seller to transfer to the purchaser a title to the property which is “good, marketable and insurable at regular rates (that is, with no additional risk premium) by a licensed title insurance company.” These three terms have three related but distinctly different meanings.
“Good” title means that the title of the seller is, in law and fact, superior to the claims of anyone else. “Marketable” title means that, whether or not the seller’s title is “good,” it would be acceptable, without objection, to a reasonably well informed person who understood the historical facts affecting the chain of title as well as the legal principles applying to those facts.
“Insurable at regular rates” basically means that a reputable title company would issue a final title insurance policy insuring good and marketable title without charging any additional premium for covering any potential defects in the title.
Even where a contract includes the desired phrase, however, the purchaser is not always fully protected because many contract forms then add another phrase which may totally or substantially remove the protection afforded by the desired phrase. The key problematical language to look for is “subject to” any matters of record. Where a contract, on the one hand, requires a seller to transfer “good and marketable title,” etc. but then, on the other hand, says that the title conveyed may be “subject to” matters of record, the right hand may taketh away what the left hand giveth.
In any event, however the conflicts between these two parts of the sentence might be resolved, a purchaser would be foolish to agree to accept a title which was subject to matters of record when the purchaser has no idea what those matters might be. Where such phraseology appears in a contract, a prudent purchaser must further modify the contract to state that the purchaser is not obligated to accept “matters of record” which adversely affect the value or use of the property.
When a title examiner performs a title search, she looks at all of the public records which may have a bearing on the title to the property being examined. These records include the records which reflect the succession of owners of the property as well as any liens which may have been placed against the property for loans secured by the property, judgments, claims of mechanics or materialmen or for any other reason.
The title examiner then prepares an abstract of title which reflects all of the facts potentially affecting the property. These include any liens as described above as well as any other potential claims against, or limitations on, the unrestricted ownership and use of the property.
In some parts of the country, it is customary for lawyers or their staffs to do the title searches and prepare the abstracts of title so that the attorney may issue a title opinion or a certificate of title. In some areas, the attorney’s opinion or certificate takes the place of title insurance. Sometimes it is issued in addition to title insurance. Lenders who finance the purchase of a home will almost always require the purchaser to obtain a title insurance policy which names the lender as a beneficiary up to the amount of the loan.
When a lender requires a borrower to provide the lender with a title insurance policy, the policy is called a “lender,” “mortgagee” or “loan” policy. It is customary for the coverage provided in a lender policy to be more comprehensive than the coverage provided in an owner’s policy issued simultaneously with the lender’s policy. This is because lenders are familiar with title insurance, they know what additional coverages to ask for and they have the clout to get them. A homebuyer unrepresented by counsel doesn’t even know what to ask for, much less how to get it.
It is worth remembering that title insurance companies spend an enormous amount of their time and money searching and evaluating titles in order to eliminate risks from coverage under their policies. They are very effective at this as is demonstrated by the extremely low level of loss payouts that title insurance companies experience (as compared with casualty insurers, for example). A title insurance company is under no obligation, legal or otherwise, to explain to you the meaning and effect of the coverages offered by its policy. In fact, title insurance companies, their agents and employees are prohibited by law from explaining (to a non-lawyer) the legal meaning or effect of anything revealed by their title examination or abstract.
Furthermore, even if title companies were legally authorized to tell you about title problems which they had uncovered, it would obviously be against their financial interest to do so. If they did, you might cancel the purchase of the home (and the title company would receive no premium) or you might demand that the title insurance company expand its coverage to include the excluded problem (which would expose the company to additional and unwanted risk).
In any event, it should be obvious that the interests of the title insurance company and its agents are diametrically opposed to the best interests of the homebuyer when it comes to deciding what your final policy will and will not cover. You need someone to represent you in the transaction who is knowledgeable, free of conflicting interests and committed to protecting your interests above all others.
As a result of several articles and speeches concerning problems with getting proper coverage in title insurance policies, some people think that I am opposed to obtaining title insurance. Not so. On the contrary, I almost always recommend owner’s title insurance to my clients. However, I also hasten to add that you should make sure that you are getting the coverage that you think you are. Owner’s title insurance can provide you with important protections that are not afforded by an attorney’s title opinion or, even, an attorney’s review of a title abstract. For example, title insurance can protect you against claims that even the most careful title examination would not reveal, like a forged deed in the chain of title, defective conveyances from people thought to be single who were really married (the missing spouse may turn up later to claim her “rights”), people erroneously believed to be dead, defective deeds executed by minors or mental incompetents and claims by missing and previously unknown heirs.
In all of these cases, title insurance may protect you in ways that even your attorney never could. For example, if you suffer a loss as a result of a risk that is covered by the policy, the title insurance company is obligated to pay that claim up to the full value of the policy in order to protect your title and to allow you to remain in possession of your property. In addition, even where a claim, ultimately, does not have to be paid, the title insurance company will be responsible for providing you with a defense of your title, even in court, if necessary. And they do it at their expense, which may be substantial.
So, clearly, I am a proponent of homebuyers obtaining title insurance. I just like to make sure that purchasers are getting true value and proper coverage for the premiums they pay.
When title problems are discovered prior to settlement, they can usually be resolved satisfactorily, although the seller or his title insurance company may sometimes be put to some expense and, sometimes, settlements have to be delayed a little bit to resolve the problems. It is rare for a title problem to totally kill a sale. In any event, the purchaser is a lot better off finding out about the problem before settlement than after. If an insoluble problem arises before settlement, the purchaser can always just walk away from the deal. After settlement, however, the exposure to the purchaser is considerably greater and that is when a purchaser is most likely to appreciate fully the advice of counsel which assured the purchaser of proper and adequate protection by his title insurance policy.
Whether it happens before or after settlement, a title problem is somewhat like lightning. The chance of it striking you are fairly small but, if it happens, it will quickly get your full attention. Your attorney can make sure that the lightning rod you buy will, in fact, protect you should you ever need it.