Why Title Insurance Is A Sometimes-Costly Evil

Just about everybody understands the need to purchase automobile and homeowner's insurance to protect against unexpected losses that are often more costly than most of us can afford to pay. We hope we never have to file such a claim but, just in case, we pay relatively affordable premiums for protection.



However, when buying or selling a house or condominium, there is another type of insurance with which most of us are unacquainted. For a one-time premium at the time of home purchase, the title insurer will protect the mortgage lender and/or the homeowner as long as the mortgage or home ownership is in effect.



To illustrate, when is the last time you heard of a homeowner encountering a title insurance claim? Although I've been buying and selling real estate almost 40 years, I have never had to file a title insurance claim, nor have I ever heard of a title insurer paying a title policy claim.



Yet, title insurance is a "necessary evil" for real estate owners. Without title insurance, most mortgage lenders won't lend. Smart home buyers won't buy without an owner's title policy to show marketable title. But our chances of ever filing a title claim are minimal.



Title insurers readily admit they pay out less than 10 percent of premiums collected for title claims. By comparison, most auto insurers pay at least 50 percent of premiums collected for policy claims. Instead, most title insurance premiums pay for title research to prevent losses, plus profit, of course.



WHY TITLE INSURANCE IS REQUIRED FOR VIRTUALLY EVERY PROPERTY SALE. Would you buy your house or condo based on the seller's handshake assurance, "You can be sure the title is good"? I hope not.



Instead, as the buyer you should insist on receiving an owner's title insurance policy to protect your equity just in case the title is not "marketable." More important, you won't be able to get an institutional mortgage unless the lender receives a lender's title policy.



Virtually the only real estate sales that do not involve a title insurance policy are transactions between friends or relatives, inherited properties, all-cash sales and foreclosure sales. Although title insurance is available for such title transfers, the buyers often trust the sellers and try to save a few dollars by not insisting on receiving an owner's title policy.



WHAT DOES TITLE INSURANCE INSURE? The exact answer depends on whether you are a mortgage lender or a property buyer. Lender's title insurance offers more extensive coverage, such as for water rights, zoning and conditions obvious from a property inspection, such as an unrecorded, overhead-power-line easement.



But a property owner's coverage is less complete unless the buyer purchases "extended coverage," which is virtually the same as a lender's title policy. Both coverages include protection for title risks, such as forged signatures in the chain of title (the major cause of title losses), encroachments, surveys (if specifically included), recorded easements, mechanics' liens, property tax liens, claims by heirs and ex-spouses, title search errors, and many others.



WHO PAYS THE TITLE INSURANCE PREMIUM? The answer to this question depends on local custom and the terms of the property purchase contract. For example, in the county where I live, the custom is the buyer pays for the lender's title insurance and, if desired, for an owner's title policy. But in the adjacent county to the south, the custom is the seller pays for title insurance.



Local custom is not binding. For example, years ago I bought a San Francisco apartment building where the custom is the buyer pays for title insurance. As I was short of cash, I wrote in my purchase offer that the seller would pay for the lender's and buyer's title insurance. My offer was accepted so I saved several thousand dollars for the title insurance premium.



Equally important, whether you are the seller or buyer who is expected to pay for the title insurance, it pays to shop around. Except in a very few states where title insurance premiums are heavily regulated, title premiums vary by title insurer. If you are buying a $100,000 house or condo, you won't save much by shopping among title insurers. However, if you are buying or selling a $1 million house, you can probably save at least several hundred dollars by shopping for title insurance.



If you are buying a new house or a new condo, chances are the developer has negotiated a discount rate with a title insurer. Be sure to inquire if you will receive a title insurance discount by purchasing from the developer's title insurer.



WHEN YOU PLAN TO "FLIP," ASK ABOUT A "BINDER TITLE RATE." Another way to save on title insurance premiums occurs if you plan to make a quick resale (called a "flip") after purchase. Ask if a discount title rate is available in your area.



Perhaps you are buying a fixer-upper house that you plan to upgrade and resell for a huge profit within less than 12 months. You are then a perfect candidate for the discounted "binder title rate."



Where allowed by state title insurance law, the binder rate is usually 110 percent of the regular title insurance premium. However, when you resell the property in less than 12 months (up to 24 months in some states), you will receive a 100 percent title premium refund and the title insurer keeps only the 10 percent extra premium.



THE BIG RISK OF NOT OBTAINING AN OWNER'S TITLE POLICY. Especially in areas where it is customary for the seller to pay for title insurance, home buyers often think, "Well, the seller is paying for my mortgage lender's title insurance policy so the title must be good, and I don't need to buy an owner's title policy."



Wrong. In the rare case where there is a major title defect, such as a home builder has a defective title, or unpaid mechanics' liens," the title insurer will pay the lender's claim up to the insured amount. But nothing will be paid to the homeowners for their lost equity if they didn't obtain an owner's title policy.



TITLE INSURANCE WON'T PAY UNTIL THERE IS A LOSS. Threat of a possible loss is not a valid reason for a title insurer to pay. Only an actual loss requires the title insurer to pay.



Title insurance is called an "indemnity policy," just like your auto or homeowner's insurance.



For example, suppose a neighbor claims your house encroaches on his lot. Until he actually files a lawsuit against you, the title insurer has no obligation to pay for a possible threatened loss. However, after the encroachment is proved, then the title insurer must pay.



SUMMARY: Title insurance is different from virtually every other type of insurance. For a one-time premium, title insurers provide coverage as long as the lender, the insured or his/her heirs own the property. Until a title loss occurs, the title insurer has no legal duty to pay even if a possible title loss might occur. For more details, please consult a local real estate attorney.



By Bob Bruss