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What Is Title Insurance |
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Title insurance is protection against loss arising from
problems connected to the title to your property.
Before you purchased your home, it may have gone through
several ownership changes, and the land on which it stands
went through many more. There may be a weak link at any
point in that chain that could emerge to cause trouble. For
example, someone along the way may have forged a signature
in transferring title. Or there may be unpaid real estate
taxes or other liens. Title insurance covers the insured
party for any claims and legal fees that arise out of such
problems.
“Is purchasing title insurance obligatory?”
It is if you need a mortgage, because all mortgage lenders
require such protection for an amount equal to the loan. It
lasts until the loan is repaid. As with mortgage insurance,
it protects the lender but you pay the premium, which is a
single-payment made upfront.
“Does title insurance do anything for me?”
The required insurance protects the lender up to the amount
of the mortgage, but it doesn’t protect your equity in the
property. For that you need an owner’s title policy for the
full value of the home. In many areas, sellers pay for owner
policies as part of their obligation to deliver good title
to the buyer. In other areas, borrowers must buy it as an
add-on to the lender policy. It is advisable to do this
because the additional cost above the cost of the lender
policy is relatively small.
“When does title insurance protection begin and end?”
With the exception noted later, title insurance only
protects against losses arising from events that occurred
prior to the date of the policy. Coverage ends on the day
the policy is issued and extends backward in time for an
indefinite period. This is in marked contrast to property or
life insurance, which protect against losses resulting from
events that occur after the policy is issued, for a
specified period into the future.
“For how long is the property owner purchasing title
insurance covered?”
Indefinitely. The owner’s protection lasts as long as the
owner or any heirs have an interest in or any obligation
with regard to the property. When they sell, however, the
lender will require the purchaser to obtain a new policy.
That protects the lender against any liens or other claims
against the property that may have arisen since the date of
the previous policy.
For example, if the contractor you failed to pay for
remodeling your kitchen places a lien on your home, you are
not protected by your title policy; the lien was placed
after the date of the policy. You will probably be required
to get the lien removed before you can sell the property.
But in the event the lien hasn’t been removed and a search
has failed to uncover it, the new lender will be protected
by a new policy.
"Will title insurance protect me against false claims
that arose after I purchased the property?"
The standard policy does not, which is a weakness. Many
events beyond your control can reduce the value of your
house after you buy it. Identity theft can result in a new
mortgage you know nothing about. A neighbor could build on
your land without your knowledge, thereby adversely
possessing and possibly eventually taking your land. Or you
may suddenly be told that you must correct a zoning
violation of the previous owner.
To deal with these issues, a new policy with expanded
coverage has been developed. I am told it is virtually
standard in California and is available in many other
states, perhaps at a small price increase. It is usually
referred to as the ALTA Homeowner’s Policy.
“Why do I need to purchase a new policy when I
refinance?”
You don’t need a new owner’s policy, but the lender will
require you to purchase a new lender policy. Even if you
refinance with the same lender, the existing lender’s policy
terminates when you pay off the mortgage. Furthermore, the
lender is concerned about title issues that may have arisen
since you purchased the property, such as the lien mentioned
in an earlier question. A new title search will uncover the
lien, and you will have to pay it off as a condition for the
refinance.
Insurers generally offer discounts on policies taken out
within short periods after the preceding policy. In some
cases, discounts are available as far out as 6 years from
the date of the previous policy.
“Does the fact that title insurance companies pay out
very little in claims indicate that it is overpriced?”
No, it may be overpriced, but not for that reason. Because
title insurance protects against what may have happened in
the past, most of the expense incurred by title companies or
their agents is in loss reduction. They look to reduce
losses by finding and fixing defects before the policy is
issued, in much the same way as firms providing elevator or
boiler insurance. These types of insurance are very
different from life, property or mortgage insurance, which
protect against losses from future events over which the
insurers have no control.
“Are title insurance premiums fair to low-income
borrowers?”
Probably they are more than fair. Most title insurance costs
arise in preventing loss rather than paying claims, and
prevention costs are not much different for a small policy
than for a large one. Despite this, premiums are scaled to
the amount of the mortgage or the value of the property,
which suggests that smaller policies may be under-priced and
larger policies overpriced.
“Does title insurance guarantee me that I will be able to
sell my property if an unforeseen claim arises?”
No. Title insurance does not prevent loss of marketability
due to a title claim, any more than fire insurance prevents
fire. If a claim arises, you probably won’t be able to sell
your property until the claim is settled by the title
insurer. The interest of the owner and the insurer may clash
in such cases. The owner usually wants settlement
immediately, whereas the insurer wants to minimize the cost
of settlement, which may require time-consuming negotiations
with the claimant.
“Why are there such large variations in the cost of title
insurance in different parts of the country?”
One major reason is that the services covered by the title
insurance premium vary in different parts of the country. In
some areas, the premium covers not only protection against
loss but also the costs of search and examination, as well
as closing services. In other areas, the premium covers
protection only, and borrowers pay for the other related
services separately.
To complicate it further, in some states the charges for
title-related services are paid to title insurance
companies, which perform the functions but charge separately
for them. In other states, borrowers may pay attorneys or
independent companies called abstractors or escrow
companies.
Of course, what matters to the borrower is the sum total of
all title-related charges. These also differ from one area
to another in response to a variety of factors. The 50
states have 50 different regulatory regimes, which affect
charges. So do local costs, competition in local markets,
and other factors. This is a largely unstudied segment of
the economy that would make a nice PhD dissertation for a
student in economics!
“Does a borrower have the right to purchase title
insurance on her own?”
Yes, although few exercise it. Most leave it up to one of
the professionals with whom they deal – real estate agent,
lender or attorney – to select the carrier. This means that
competition among title insurers is largely directed toward
these professionals who can direct business rather than
toward borrowers.
“If a borrower does shop for title insurance, would it
pay?”
Perhaps. It is difficult to generalize because market
conditions vary state by state, and sometimes within states.
I would certainly shop in states that do not regulate title
insurance rates: Alabama, District of Columbia, Georgia,
Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West
Virginia.
You would be wasting your time shopping in Texas and New
Mexico because these state set the prices for all carriers.
Florida also sets title insurance premiums but not other
title-related charges, which can vary.
In the remaining states, the situation is murky and it may
or may not pay to shop. Insurance premiums are the same for
all carriers in “rating bureau states”: Pennsylvania, New
York, New Jersey, Ohio and Delaware. These states authorize
title insurers to file for approval of a single rate
schedule for all carriers through a cooperative entity. Yet
in some there may be flexibility in title-related charges.
More promising are “file and use” states – all those not
mentioned above -- which permit premiums to vary between
insurers.
It is a good idea to ask an informed but disinterested local
whether it pays to shop in the area where the property is
located. Just keep in mind that those likely to be the best
informed are also likely to have an interest in directing
your business in the direction that is most advantageous to
them.
Copyright Jack Guttentag 2003
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