WHAT IS TITLE INSURANCE?

Our firm handles many real estate transactions for our clients and a lender requirement for just about any real estate purchase or refinance is that the client purchase title insurance.  The following is an abstract of an informational article published by CATIC,  New England’s largest domestic title insurance underwriter, and the company we use to provide title insurance to our clients.
     
Before the advent of title insurance as a commonplace part of the closing process, when a property owner or prospective property owner desired to obtain mortgage financing, among the processes put into motion was the search of the land records to determine the status of title to the premises to be mortgaged. This search was performed by a lawyer or other title searcher who would examine the chain of title by running each applicable name through the indices until all instruments comprising muniments of title were put together, along with other items, such as liens, etc., which might affect that title. Should this title searcher find a break in the chain of title, he or she would search outside of the land records, usually in the pertinent Probate Court or Superior Court records, for information which might serve to explain the gap in title. Similarly, the title searcher would check the town public records to ascertain whether any taxes or special assessments affected the subject premises. Once all this information was compiled, it would be given to an attorney who, after evaluating all of the information, would issue a certificate or opinion of title, stating that, based on the information, he or she is of the opinion that the property is owned by a particular person, subject only to those interests, liens or encumbrances specifically set forth in the opinion of title. In reliance on such certificates of title, lenders would make mortgage loans on property and potential purchasers would agree to go forward and close on the property.

This system had some weaknesses, though. Even the most competent title searcher can abstract only what is, in fact, on the public records. The searcher generally will not be able to uncover evidence of forgery, errors in tax records, inaccurately recorded documents or the existence of parties claiming title from other sources. In recognition of this, the attorney would qualify the title opinion by stating that the examination was limited to the abstract and did not encompass or reflect any information not available through a search of the land records. Should a title defect eventually become apparent, the lawyer would be responsible to the client only for any negligence in the searching process and not for information undiscoverable by the searcher. In other words, should a loss occur which could not be attributable to the attorney’s or searcher’s negligence, the individual suffering the loss would not be able to seek reimbursement from the attorney or searcher. Even if the loss were attributable to the attorney’s negligence, a time element often came into play, since statutorily, there is a prescribed period of time within which one can bring an action against an attorney in connection with title opinions. Should there be a loss, would it become evident in time for suit to be brought within this prescribed period? If not, the party suffering the loss would forever be unable to sue the attorney for the alleged negligence.

Common sense dictated that a better, more complete means of title assurance be found, one which would cover risks above and beyond those matters set forth in the normal title abstract and title opinion. The means employed to provide this added protection was title insurance.

Title insurance is like other types of insurance in that it is basically a contract between the insurer and the insured whereby the insurer agrees to reimburse the policy holder, up to a specified sum, should a loss be sustained against an insured interest. The insurance company assumes this risk, collects its premium and spreads the risk among all of its policy holders. This is the basic principle upon which all insurance rests, that in order that an individual not have to bear the entire risk for a particular loss, a smaller amount is paid to an insurer who agrees to accept and assume the risk of loss. This element of risk assumption and risk spreading is common to all types of insurance, whether it be fire, auto, life or title insurance.

Title insurance is different from other types of insurance, however, in that it is retrospective; it is designed to protect an insured owner or lender from losses arising from defects occurring prior to the date of the policy. In essence, the title policy operates as a “snapshot” of the title to the property at a particular point in time - if the title to the property is other than as “shown” in the snapshot, and a loss is suffered as a result, then the policy holder is protected under the terms of the policy. Since title insurance operates retrospectively, it lends itself to risk elimination, whereby known risks are dealt with prior to the issuance of a policy, e.g., mortgages lacking releases are tracked down, questionable documents are investigated, necessary documentation is obtained, etc. (Of course, not all title risks can be eliminated, since many potential title defects are not generally discoverable, such as misindexed liens or forged signatures.) Other types of insurance, however, are prospective, in that they insure against future occurrences, and do not lend themselves to risk elimination.

Another way in which title insurance differs from other types of insurance concerns the premium structure. There is only a single premium charge for title insurance, and the protection afforded by the policy lasts for at least as long as the insured has an interest in the property. (In the case of an Owner Policy, the coverage will last even after the insured has transferred the property, as to any warranty covenants contained in a deed from the insured to the purchaser of the subject property.) Other types of insurance, however, run for a specified period of time, such as year-to-year, and require additional periodic payments for continuation of coverage.

There are owner policies and mortgagee, or lender, policies. The owner policy protects the owner of the property, while the mortgagee policy protects the lender who has agreed to provide financing to the owner of the property. Generally, the owner/borrower pays the title insurance premium for the mortgagee policy, as an element of the closing costs typically assumed by the owner. For this reason, owners tend to believe, albeit erroneously, that they have received title insurance coverage when buying a mortgagee title policy for their lender. To the contrary, the owner receives no title insurance protection unless he or she also purchases an owner title policy. In order to encourage the purchase of owner’s coverage, many title insurers offer reduced rates when an owner policy and mortgagee policy are purchased simultaneously.

What does an owner policy insure?
The owner policy insures, as of the effective date of the policy, against loss or damage sustained by the insured owner, by reason of:

•title vested other than as stated;
•any defect in, or lien or encumbrance on such title;
•unmarketability of the title; and
•lack of a right of access to and from the land.

(Note that the owner policy may also provide insurance against unrecorded mechanic’s liens, if the owner supplies any required documentation to the title insurer that indicates the unlikelihood that such liens will be recorded.)

The owner policy also provides that the title insurer will pay the costs, attorney’s fees and expenses incurred in defense of the title, in accordance with the policy’s terms.

What does a mortgagee policy insure?
The mortgagee policy insures, as of the effective date of the policy, against loss or damage sustained by the insured lender, by reason of:

•all four items mentioned above, under owner policy coverage;
•the invalidity or unenforceability of the lien of the insured mortgage;
•the priority of any lien or encumbrance over the lien of the insured mortgage;
•the statutory lien for labor or materials which has, or may gain, priority over the lien of the mortgage (the so-called “mechanic’s lien); and
•the invalidity or unenforceability of any assignment of the insured mortgage, or the failure of the assignment to vest title in the insured assignee.

The mortgagee policy also provides that the title insurer will pay the costs, attorney’s fees and expenses incurred in defense of the title or the lien of the insured mortgage, in accordance with the terms of the policy.

What are some typical types of claims made under a title insurance policy?
One common type of claim made under a title insurance policy concerns errors made in searching the title to a particular parcel. For example, there may be a mortgage of record, or a tax lien of record, which was not discovered for one reason or another in the search of the title. The failure to discover the item may be due to an error by the title searcher, or it may be attributable to a misindexing of the item by the town clerk.

Claims have been received which relate to forged deeds, forged releases of mortgages, fabricated or expired powers of attorney, undisclosed heirs, inadequate property descriptions and ineffective waivers. Other claims are made in response to a neighboring property owner’s assertion of a right to use the subject property in some fashion which is incompatible with the interests of the insured owner.

Resolution of a claim, obviously, depends first on whether the particular claim made is in fact covered by the policy, i.e., has there been a loss and is that loss insured against by the policy issued to the claimant. If an exception had been taken in the policy for the matter complained of, then there would not be coverage. For example, if an owner title policy contained an exception for matters which a survey would have revealed, then a claim made relative to the encroachment of a neighbor’s fence onto the property would not be covered under the terms of the policy, since the encroachment would have been revealed by a survey of the property.

What is not covered by the policy?
The title policy does not insure against matters excluded from coverage, nor against matters which are exceptions to coverage.

•Exclusions from coverage are preprinted on the policy and apply to all policies - they are not site-specific. For example, excluded from coverage is the risk that the lien of the insured mortgage will be deemed unenforceable because of the failure of the lender to comply with the applicable “doing business” laws of the state where the land is located. This exclusion is based on practicality, in that it is more reasonable and efficient that the lender and not the title insurer be responsible for the proper operation of the lender’s business.

•Exceptions are set forth in Schedule B of the policy and are generally site-specific, i.e., they are items known to affect the particular property being insured, and represent outstanding interests in others which are known to the insured and therefore not insured against. For example, there may be an easement of record in favor of a neighboring landowner, giving the landowner the right to pass and repass over a particular portion of the property. This matter will be inserted into Schedule B as an exception to coverage, and the insured is not insured against such matter. Typical exceptions include easements to utility companies, common driveways and rights of others to pass and repass over a portion of the land. All title policies contain at least one exception, even if it is only for real property taxes not yet due and payable.

This article is for informational purposes only. It is not intended to be, nor should it be relied upon, for legal advice.