Nuts and Bolts of Title Insurance - August 2014

Terry Jessop & Bitner Newsletter

Issue 12, August 2014

Purchasing real property, whether commercial or residential, is often a major investment. For most homeowners, the purchase of a residence is the biggest investment they will ever make. Because the stakes are high, every purchaser should satisfy himself that when the sale closes, he will have good title to the property. The best way to do so is to buy title insurance.

What It Is

Compared to other types of insurance, title insurance is relatively straightforward. (Anyone care to de-code Obamacare?) The purposes of title insurance are to ensure: (1) that a seller has the right to sell; (2) that the property is unencumbered except as disclosed in the policy; (3) that the purchaser gets the property at closing; and (4) that a lender will have a priority interest in the property. Unlike other types of insurance, which guard against future injury or accident, title insurance generally insures against the past actions of prior owners, lenders, contractors, and anyone else who may claim an interest in the property. (There are exceptions to this rule. Please talk to a real estate attorney or a title insurance agent about the scope of coverage.) When researching the title to a property in connection with a proposed sale, a title company will investigate the county records to find any and all loans, liens, easements, or other encumbrances which affect the property. The title company identifies all such interests in a document called a title commitment, which a buyer and potential lender review as part of their due diligence.

Title insurance is a contract of indemnity and defense. If the title company misses a recorded loan or lien then the insurance company may be on the hook to pay the claimed amount, or to otherwise provide clear title to the property. However, the insurance company's liability is limited to the amount and other terms of the policy.

What It Isn't

A title insurance policy is a contract between the insurance company and the owner or lender who holds the policy. Because it is a contract, it is limited to the terms of the agreement. A common misconception is that title insurance covers boundary disputes. Not so. Although extended coverage is available for a price, standard title policies DO NOT cover boundary issues that could have been discovered with a survey. Also, the policy only benefits the owner or lender named therein. As a general rule, if an owner sells the property to a third party but conveys title by way of a quit claim deed, the new owner cannot rely on the original owner's policy to cover any pre-existing claims. However, if the owner conveys the property by warranty deed then coverage under the original owner's policy for pre-existing claims continues even after the conveyance is complete. Nevertheless, the buyer should obtain her own title policy, even if the seller conveys the property by warranty deed.

You Get What You Pay For

The good news is that you only pay for title insurance once (per sale or re-finance). Unlike health or auto insurance, which have recurring annual premiums, title insurance remains in effect for as long as the owner owns the property or has liability under a warranty deed: one payment only. Premiums are calculated based on the value of the insured property. Utah law requires each title insurance company to establish rates and fees and to submit them to the Department of Insurance. Those fees are available to the public upon request. The law also requires each title company to operate at "not less than" the cost of doing business. Hence, while one title company's fees may differ from another's, the law forbids deep discounts or so-called blue light specials.

There are many great title companies in Utah who provide excellent service to their clientele. Call us if you have questions about the scope or coverage of a particular policy. And if things go wrong we can help you navigate the claims process.

©Terry Jessop & Bitner August 2014