- Title Insurance 101: A Summary Guide
- April 1, 2011
- Law Firm: Keith Sirlin Associates P.C. - Waterford Office
Every summary of title insurance
begins with an attempt to define it. This
is difficult because title insurance is an
insurance product unlike almost any
other. It is an agreement to pay the insured’s
financial loss if his or her ownership
interest in land is different than as
stated in the policy. In other words, the
policy will define what the insured owns
and then protect the insured against
loss if that declaration is not correct.
To better understand this definition,
it might help to explain
what title insurance is not.
Title insurance protects against loss .
Title Insurance Protects Against Loss/It Does Not Promise To Fix Defects
If a purchaser buys a house and
later discovers that the local telephone
company has an undisclosed easement
across the middle of the property’s back
yard, the title insurer must pay for the
reduction in the property’s value because
of the easement. The insurer does not
have to pay to eliminate the easement.
Title insurance only insures ownership
Title Insurance Only Insures Ownership
Title insurance does not assure a
buyer that the property to be sold is
fit for any particular purpose. It may
be swamp land in Florida. Title insurance
simply confirms ownership.
Title insurance helps to avoi d
Title Insurance Helps To Avoid Risk-Not To Assume It
The key to a title insurance commitment
or policy is that it discloses
risk. Most insurance policies simply
assume risk. If a house burns down,
the fire insurance policy should pay
for the cost to rebuild it. Its insurance
premiums are based upon determining
the cost of the risk and spreading
that cost among all policy holders.
Title insurance is different. It attempts
to discover all of the limitations
and defects in the ownership
of property and to disclose them so
that they can be eliminated prior to
closing. Its insurance premiums are
based upon the cost of researching the
property’s title. This product makes
the assumption that people want assurance
that they own their homes,
not simply the opportunity to collect a
check if they discover that they do not.
By way of example, assume a property
is subject to an undischarged mortgage.
A title insurance policy will not automatically
insure against that mortgage.
Instead, it will disclose the mortgage
and, thus, give the buyer an opportunity
to make sure the mortgage is paid and
discharged before the property is sold.
For this reason, it cannot be stressed
enough that A BUYER MUST READ
HIS OR HER TITLE INSURANCE
CLOSING. This leads very nicely into
the topic of Title Insurance Forms.
Title Insurance Forms
Many title insurance summaries
devote considerable space to discussing
different policy forms. For real
ever, the policy is rarely an issue. The
document that discloses title defects
and must, therefore, be reviewed is a
Commitment For Title Insurance.
A Commitment is just that: it commits
to issue a policy provided certain
requirements are met. These typically
include that the buyer or lender acquires
a deed or mortgage, has it recorded and
pays the insurance premium. Other
requirements may be listed, but the
policy will still be issued, even if
they are not fulfilled. Instead,
additional exceptions from
coverage may be added.
In general, a title insurance
divided into four parts:
1) the cover or jacket,
which describes its terms and
conditions; 2) Schedule A, which
is a declaration page describing
who and what is insured; 3)
Schedule B-I, which lists the
requirements for coverage; and
4) Schedule B-II, which
lists the exceptions
The Commitment Jacket
This section is standardized
for each insurance
company. It merely
confirms that the
company is committing
to provide coverage.
In some cases, that jacket may
also list standard requirements and
exceptions from coverage, which
will be described in later sections.
This schedule lists the type
of policy or policies to be issued;
the current owner of the land; and,
the property’s official or “legal”
description. Most importantly,
however, Schedule A lists the commitment’s
“Effective Date.” This is the
time through which the property’s title
has been examined. Any defects that are
recorded after the Effective Date are not
automatically insured against. Unlike
other forms of insurance, title insurance
protects against matters that have
already happened. It does not insure
against what may happen in the future.
As stated, this schedule lists the
requirements that must be met before
a policy will be issued. Many of these
items are standard. For example, the
commitment will require that a deed
or mortgage be delivered and recorded;
that the premium be paid; and that the
parties to the closing be disclosed to the
company. Schedule B-I will also usually
disclose taxes that affect the property
and must be paid. In addition, it will
often list mortgages that must be
paid and discharged for the
buyer or lender to obtain
“clear title.” Special attention
must be paid to
all of these items because
if these requirements are
not met, additional exceptions
will be added to
the policy when it is issued.
This is the schedule that lists
all of the limitations to title,
which will appear as “exceptions”
to the policy coverage.
This list must be
reviewed very carefully.
fall into two
and special. Standard exceptions
appear on all commitments.
While they differ
somewhat from company to
company, they typically include:
1) rights of parties in possession,
such as tenants, if any;
2) unrecorded easements; 3)
or other matters that an
accurate survey would
disclose; and 4) unrecorded
construction liens. All of
these items can affect a
property’s title even though
no evidence of them has been recorded
in the public land records. Typically a
buyer can request “extended coverage.”
In that case, these exceptions will be
deleted if a satisfactory affidavit and
survey or mortgage report are supplied
to the company. Based upon what is
disclosed, however, a title company
may still raise a special exception to
cover these items. For instance, if an
affidavit discloses that a tenant occupies
the property to be sold, the standard
exception for parties in possession may
be deleted, but a special exception for
that tenant’s rights may be added.
Special exceptions, therefore, are
those items that are unique to the particular
property being sold. They may
cover items one would expect, such as
building and use restrictions or utility
easements. They might also disclose
problems, however, such as mortgages
or tax liens, which should have been
paid and discharged. This list needs to
be thoroughly reviewed by a prospective
buyer and he or she must be comfortable
with all of the items included.
Can I Rely On My Title Insurance?
Yes, but be aware of its limitations.
Title insurance coverage is regulated
by state insurance agencies and it has
been dependably sound. With all of
the problems among financial service
companies, title insurance companies
have stood out as stable and solvent.
Their policies’ coverage, however, may
not always meet a buyer’s needs.
In the introduction, a situation in
which a utility easement ran through
the middle of a property’s back yard was
outlined. Title insurance would only pay
for the reduction in that property’s value
because that easement exists. That reduction
in value could be nominal. Title
insurance will not pay to remove the
easement. Suppose, however, that a buyer
specifically purchased that home with
the dream of installing an in-ground
pool. That buyer’s title insurance policy
would not make him or her whole.
Property information is only as good
as the company providing it. Not all
title insurance is the same. As with most
services, it pays to know the reputation
and ability of the company providing
them. A buyer’s best protection is
to do business with a title insurance
provider that he or she can trust.