The immense value of title insurance has been well documented. Generally speaking, title insurance provides three somewhat distinct, yet significant coverage’s:
- Fatal title defects that could cause one to lose their property altogether, such as fraud, forgeries, inheritance issues, or execution/signing issues;
- Defects that could require the expenditure of significant amounts of money to cure the defect, such as a missed mortgage, lien, or judgment; or
- Defects that could require the removal of all or a portion of the improvements on the property, such as encroachments into easements or setbacks.
As opposed to other forms of insurance, title insurance is purchased one time (usually when the property is purchased), and provides coverage to the owner not only for the period of time that they own the property, but also coverage that can continue to afford protection to the owner even after they sell the property.
Title insurance is so significant that most reputable closing agents will not even close a transaction without making sure that a title insurance policy is purchased to protect the parties. But some closing agents do try to minimize the significance of title insurance. In fact, some even go so far as to discourage the parties from purchasing title insurance. The theory, in most cases, is that a title policy is not necessary, and if there is a title issue, the buyer can simply sue the seller to resolve that issue. In other words, the seller in essence becomes the title insurer (sellers should be VERY wary of transactions in which the buyer is not obtaining title insurance for this reason alone). That logic is fundamentally flawed for three significant reasons.
First, Section 9 (C) of both FR/BAR Contracts provides that a title policy will be purchased and paid for by the party selecting and paying for the closing agent’s services. In other words, the party who is entitled to designate the Closing Agent is contractually obligated to purchase a title policy. This is also common in most developer based contacts as well. This is a material term that benefits both the buyer and seller, and the failure to purchase a policy is technically a breach of the contract by the party who is obligated to furnish the policy.
Second, trying to track down a seller, successfully sue a seller, and then recover from that seller is much easier said than done. Many sellers are not local (some are even foreigners), and no seller is as financially solvent as a title insurance company. And ask any real estate litigator how many of their clients enjoy the process of costly, protracted legal action. Logic would suggest that a claim to a multi-billion dollar title insurance company is a much more cost and time effective way to successfully address and resolve a title issue than a protracted lawsuit against a seller of unknown financial wherewithal.
Third, the warranties of title that a seller provide at closing do not cover many of your typical title claims. For example, almost every Warranty Deed that a seller delivers to a buyer at closing states that it is subject to restrictions, easements or other matters of record. In other words, if it’s a matter of record, such as an easement, then the seller is not responsible for it. If the house was built into an easement or setback of record, tough luck. If the property violates a recorded deed restriction, too bad.
The merits of title insurance are simply too lengthy to chronicle in a brief blog. But the next time a closing agent discourages title insurance, ask for a copy of their malpractice policy. That will likely be the only recourse the buyer (or seller) may have in the event of a title defect. As always, should you have any questions about title insurance, we encourage you to speak with a reputable real estate attorney.
Berlin Patten Ebling, PLLC
This article authored by Evan N. Berlin, Esq., firstname.lastname@example.org
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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