A friend of mine just bought a vacant lot and plans to build a house on it someday. While telling me about the purchase, he mentioned that he thought it was great that he could pay so little for title insurance, yet still insure the full value of his future home against a title defect.
While trying not to deflate his bubble too much, I explained that the title insurance he purchased very likely would not cover the house, or any other improvements he might make to the property. The title insurance policy only insures him (the policy holder) up to the amount stated on the face of the policy.
The amount on the face of the policy is almost always limited to the market value of the property at the time of purchase. This means that his title policy covers the value of the vacant land at the time of purchase, but any additional value created by appreciation, construction of improvements, or by any other means would not be covered.
To make sure he is protected, I told my friend that when he builds his house, he should make sure to get a new title policy to ensure that his policy coverage amount is sufficient to cover the value of the house and the lot.
Without having a policy coverage amount equal to the value of the house and lot combined, a defect in the land’s chain of title could cause him to lose his lot and his house. Without the new policy, his original title insurance policy would only allow him to seek reimbursement up to the face value of the policy, which means he could essentially lose the value of his house (and any appreciation of the lot) without any sort of compensation.
Just because you bought title insurance does not mean that your property is completely covered. Be sure your title policy provides enough coverage to cover your land and any improvements you have on it.