“Title insurance” is a term that is frequently uttered when discussing real estate transactions. Title insurance costs money, which should grab your attention, but do you really know what it is? It is not just another closing cost reflected on a settlement statement. In fact, title insurance is a unique animal in the insurance world, and understanding its nuances can protect your investment – for much longer than you may think.
This post is a title insurance guide for potential buyers of real estate, and is intended to provide valuable information to real estate enthusiasts engaged in any aspect of a transaction. Although this post focuses on title insurance as it relates to the purchase and sale of real estate, it is important to note that title insurance also applies to lending transactions involving real estate.
What is Title Insurance and Why is it Unique?
Title insurance is a type of insurance paid for at closing to benefit the buyer. Some assets should be insured, and many believe that real estate, both residential and commercial, fits this category. The word “insurance” can be misleading because title insurance is unlike most insurance products. A significant characteristic of title insurance is that there is a one time premium payment for a title insurance policy. Additionally, it is unnecessary to shop around for the best premium rate. In Florida, the cost of title insurance is based on a promulgated rate set by law. Nevertheless, you would be wise to ask your attorney or title agent, prior to closing, whether you qualify for any premium discounts available by law, such as a re-issue rate or simultaneous issue rate. Obtaining a discount on title insurance can create a welcome cushion in your budget.
Another distinct aspect of title insurance unlike other types of insurance is that it insures the past, not the future. The effective date of a title policy is generally contemporaneous with the recording of the deed conveying the property to the owner, and the title insurance coverage applies to matters occurring before that time. It insures the prior chain of title. Subject to certain exclusions, title insurance protects an owner from title defects occurring prior to the owner’s purchase of the property even though the defects are not discovered until after closing, sometimes many years after closing and upon the prospective resale of the property.
By way of illustration, assume you own (or at least you think you own) property, but several years after closing you discover that your “seller”, to whom you paid substantial moneys, never held good title. In fact, a third party is discovered to be the true owner. How could this happen? Mistakes happen. Land records are only as good as the information that goes into them, and title examinations are only as good as the people who perform them. Fortunately, your title insurance should protect you as an innocent purchaser, although the recourse available to you is beyond the scope of this article.
Maximizing Your Coverage
Title insurance coverage is typically limited to the amount that you pay for the property. However, there are actions you can take to maximize your coverage. As a buyer of real estate, you and your attorney should pay close attention to the title commitment that should be obtained prior to closing. Most contracts allow a limited amount of time prior to closing for a buyer to obtain, review and, if appropriate, object to the exceptions from coverage noted in the title commitment. This is your window of opportunity; speak now or forever hold your peace.
The pre-closing due diligence process is critical with regard to title insurance. Examining the title commitment is more than simply checking to make sure the seller is shown as the owner of the property and that there are no obvious liens. A title insurance commitment will contain “exceptions,” which will ultimately be exclusions from policy coverage. As a buyer, you want your policy to contain as few exceptions as possible in order to strengthen your coverage. Certain title exceptions can be disastrous to a buyer. It is not uncommon for a title exception to be innocuous on its face, yet contain restrictions or third party interests that can negatively impact your use of the property and its marketability. Unless appropriately objected to, all title exceptions listed in the title commitment will be included in your policy as exceptions from coverage. Your goal as the buyer is to reduce the number of exceptions to maximize your title insurance coverage.
Another way to maximize your coverage is through supplements, or “endorsements”, to your title insurance policy. Many endorsements relate to loan policies as opposed to owner policies, but there are several endorsements available to owners when the circumstances warrant. Endorsements must be requested prior to or after closing, depending on the circumstances, and all require an additional, sometimes nominal, payment. When obtaining a post-closing endorsement, be sure to ask whether the effective date of your policy can be brought forward to further maximize your coverage.
Now that you have paid your one-time premium and maximized your coverage, you should understand the shelf-life of your title insurance policy. Other types of insurance need to be renewed on a regular basis with recurring payments. Title insurance, however, generally continues in perpetuity so long as the insured retains an interest in the land or has liability by reason of covenants of warranty made by the insured in any subsequent sale of the land. In other words, your coverage not only continues as long as you own the property, but long after you have sold the property (so long as the deed you give to the new buyer contains covenants of warranty).
It is possible, however, to inadvertently terminate your coverage. Gifts of real estate to family members can be wonderful, but using a quit claim deed to accomplish the transfer can affect your coverage. Similarly, conveyances between related entities, absent title warranties, can cause unintended consequences to your coverage. Finally, most policies include a litany of standard escape clauses favoring the insurer, such as failing to timely notify the insurer when you have notice of a claim.
If nothing else, remember one thing: title insurance is likely being paid for at closing to benefit the buyer, and the buyer should understand and maximize the insurance coverage prior to closing, before it is too late.