What is Title Insurance?
A title insurance policy is an insured statement of the condition of title, or ownership, of real property. Prior to the issuance of a policy, a title report or commitment is prepared after a search of records, maps and documents affecting the parcel in question. The policy protects the named insured against title defects, liens and encumbrances existing as of the date of the policy and not specifically accepted from coverage. In the event of a challenge that calls into question the terms of a title policy, the Company provides legal defense for the policyholder, cures title, or promptly pays all valid claims or losses up to the amount of the policy.
Title insurance is not like any of the traditional forms of insurance. Unlike the other types of insurance, it is not concerned with risk assumption, but rather, risk elimination. Title insurance does not insure against the possible happening of a known and designated future event such as fire, accident, or death rather, it states a fact concerning the title to real estate up to the time the policy is issued and will protect against almost all challenges to the correctness of that statement. Title insurance is designed to protect the insured from losses arising because of defects or events occurring priors to the time the policy is issued. However, the new Eagle Policy provides certain coverage for post policy events.
Title insurance is a contract of indemnity and as such, the covenant of its issuer is to provide reimbursement to its beneficiary in the event of the occurrence or existence of certain conditions as expressed in the policy. The excellence or negligence of the title insurer’s work in its examination of title and evaluation of the transaction is irrelevant to the relationship between the insurer and the insured. This concept was well stated in Lawrence v. Chicago Title Cornpany, 237 Cal. Rptr. 264 (1987):
“Title insurance is a contract for indemnity under which the insurer is obligated to indemnify the insured against losses sustained in the event that a specific contingency, e.g., the discovery of a lien or encumbrance affecting title, occurs. The policy of title insurance, however, does not constitute a representation that the contingency insured against will not occur. Accordingly, when such contingency occurs, no action for negligence or negligent misrepresentation will lie against the insurer based upon the policy of title insurance alone.”
A single premium is charged for title insurance when the policy is issued. It is based on the full value of the premises (in the case of an owner’s policy) and on the full principal debt (in the case of a mortgage policy). The policy remains in effect for as long as the insured retains an interest in the property.
Why Do I Need Title Insurance?
Title insurance protects the policy owner in the event a third party makes a claim to the title of the property. A title examination is prepared prior to your closing, and presumptively there will be no title problems when you close. However, there are several scenarios that can cause defects in title property that are undetectable by a title exam. Here are a few examples:
- Suppose Mr. and Mrs. Smith own the property jointly, but Mr. Smith forges Mrs. Smith’s signature on the deed, conveying the property to you. If Mrs. Smith sues for the property, she wins, you lose. A forgery is not discernable in a title exam.
- Similarly, suppose Mr. Smith engaged in a fraudulent conveyance to you by pretending to be the property owner, Mr. Jones, when in fact he was not. Fraud is not discernable in a title exam either.
- If your builder fails to pay a subcontractor, the subcontractor may file a lien on your house to collect his money. Although the lien is filed a month before your closing, it may not be listed on the courthouse index for several months. Therefore, the title examiner would not be able to find that lien in his title exam.
- Assume again that the subcontractor files a lien on your house but the lien has been misfiled in the county records, the lien is valid but not apparent to the examiner.
In the event a third party makes a successful claim on your title you could lose your home. Even if someone makes a claim to your property that is eventually determined by a court to be spurious, your legal fees to defend that claim will be significantly more than the one-time cost for your coverage.
When you receive a Good Faith Estimate from your lender, you will see a charge for Lender’s Title Insurance. As a condition of the loan, the lender will require this coverage to protect the loan amount. However, the lender’s title insurance does not cover your equity in your house. You will have the option at closing to purchase Owner’s Title Insurance. The cost of title insurance is a one-time fee at closing determined by a rate chart issued by the title insurance company. The policy is effective for as long as you own the property.
Please note that Owner’s Title Insurance is usually not included on your Good Faith Estimate because it is not a requirement of your lender. Our firm, however, will include the charge for that policy on your Settlement Statement. You may elect to refuse the coverage at closing. Be sure to discuss Owner’s Title Insurance with your other real estate professionals.
Below are additional instances when a title policy protects you against defects in the chain of title:
- Forged deeds, mortgages, satisfactions, or releases.
- Deed by person who is insane or mentally incompetent.
- Deed by minor (may be disavowed).
- Deed from corporation, unauthorized under corporate by-laws or given under falsified corporate resolution.
- Deed from partnership, unauthorized under partnership agreement.
- Deed from purported trustee, unauthorized under trust agreement.
- Deed to or from a “corporation” before incorporation, or after loss of corporate charter.
- Deed from a legal nonentity (styled, for example, as church, charity, or club).
- Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized, or defective under foreign laws.
- Claims resulting from use of “alias” or fictitious name style by a predecessor in title.
- Deed challenged as being given under fraud, undue influence, or duress.
- Deed following non-judicial foreclosure, where required procedure was not followed.
- Deed affecting land in judicial proceedings (bankruptcy, receivership, probate, conservatorship, dissolution or marriage) unauthorized by court.
- Deed following judicial proceedings subject to appeal or further court order.
- Deed following judicial proceedings where all necessary parties were not joined.
- Lack of jurisdiction over persons or property in judicial proceedings.
- Deed signed by mistake (grantor did not know what was signed).
- Deed executed under falsified power of attorney.
- Deed executed under expired power of attorney. (Death, disability, or insanity of principal)
- Deed apparently valid, but actually delivered after death of grantor or grantee, or without consent of grantor.
- Deed affecting property purported to be separate property of grantor, which is in fact community or jointly owned property.
- Undisclosed divorce of one who conveys as sole heir of a deceased former spouse.
- Deed affecting property of deceased person, not joining all heirs.
- Deed following administration of estate of missing person who later reappears.
- Conveyance by heir or survivor of a joint estate who murdered the decedent.
- Conveyances and proceedings affecting the rights of service member protected by the Soldiers and Sailors Civil Relief Act.
- Conveyance void as in violation of public policy (payment of gambling debt, payment for contract to commit crime, or conveyance made in restraint of trade).
- Deed to land including “wetlands” subject to public trust (visiting title in government to protect public interest in navigation, commerce, fishing, and recreation).
- Deed from government entity, vulnerable to challenge as unauthorized or unlawful.
- Ineffective release of prior satisfied mortgage due to acquisition of note by bona-fide purchaser (without notice of satisfaction).
- Ineffective release of prior satisfied mortgage due to bankruptcy of creditor prior to recording of release (avoiding powers in bankruptcy).
- Ineffective release or prior mortgage or lien, as fraudulently obtained by predecessor in title.
- Disputed release of prior mortgage or lien, as given under mistake or misunderstanding.
- Ineffective subordination agreement causing junior interest to be reinstated to priority.
- Deed recorded but not properly indexed so as to be locatable in the land records.
- Undisclosed but recorded federal or state tax lien.
- Undisclosed but recorded judgment or spousal/child support lien.
- Undisclosed but recorded prior mortgage.
- Undisclosed but recorded notice of pending lawsuit affecting land.
- Undisclosed but recorded environmental lien.
- Undisclosed but recorded option or right of first refusal, to purchase property.
- Undisclosed but recorded covenants or restrictions, with (or without) rights of riveter.
- Undisclosed but recorded easements (for access, utilities, drainage, airspace, views) benefiting neighboring land.
- Undisclosed but recorded boundary, party wall, or setback agreements.
- Errors in tax record (mailing tax bill to wrong party resulting in tax sale, or crediting payment to wrong property).
- Erroneous release of tax or assessment liens, which are later reinstated to the tax rolls.
- Erroneous reports furnished by tax officials (not binding local government).
- Special assessments which become liens upon passage of a law or ordinance, but before recorded notice or commencement of improvements of which assessment is made.
- Adverse claim of vendor’s lien.
- Adverse claim of equitable lien.
- Ambiguous covenants or restrictions in ancient documents.
- Misinterpretation of wills, deeds, and other instruments.
- Discovery of will of supposed intestate individual, after probate.
- Discovery of later will after probate of first will.
- Erroneous or inadequate legal descriptions.
- Deed to land without a right of access to a public street or road.
- Deed to land with legal access subject to undisclosed but recorded conditions or restrictions.
- Right of access wiped out by foreclosure on neighboring land.
- Patent defects in recorded instruments (for example, failure to attach notarial acknowledgment or a legal description).
- Defective acknowledgment due to lack of authority of notary (acknowledgment taken before commission or after expiration of commission).
- Forged notarization or witness acknowledgment.
- Deed not properly recorded (wrong county, missing pages or other contents, or without required payment).
- Deed from grantor who is claimed to have acquired title through fraud upon creditors of a prior owner.
And extended coverage may be requested to protect against such additional defects as:
- Deed to a purchaser from one who has previously sold or leased the same land to a third party under an unrecorded contract, where the third party is in possession of the premises.
- Claimed prescriptive rights, not of record and not disclosed by survey.
- Physical location of easement (underground pipe or sewer line) which does not conform with easement of record.
- Deed to land with improvements encroaching upon land of another.
- Incorrect survey (misstating location, dimensions, area easements, or improvements upon land).
- “Mechanics’ lien” claims (securing payment of contractors and material suppliers for improvements) which may attach without recorded notice.
- Federal estate or state inheritance tax liens (may attach without recorded notice).
- Preexisting violation of subdivision mapping laws.
- Preexisting violation of zoning ordinances.
- Preexisting violation of conditions, covenants, and restrictions affecting the land.
What Are the Advantages of Title Insurance Over a Title Opinion?
A title policy has advantages over an attorney’s title opinion. The opinions are based upon a localized standard of care, and, if title is other than as described in the opinion, the author of the opinion will be liable if the local standard of care was not followed. In other words, the author of the opinion would not be liable unless he was negligent. Title opinions are based upon the indices prepared by the Clerk of Court and Recorder of Mortgages. If the Clerk has erroneously indexed an act, or failed to index an act, such as a sale, a mortgage, or a judgment, the author of the opinion has no liability. Also, title opinions have exceptions which are not custody made in a title insurance policy. However, an examination cannot, nor is it expected to, address or protect against the kinds of situations or problems which an examination could not reveal, such as forgeries, missing heirs, incorrect or inaccurate tax information, and the lie. A title opinion provides only the names of persons in whom title is vested, a legal description of the property, and a listing of all exceptions to the title. In addition to this information, the title commitment specifically lists all conditions, which must be satisfied to insure a mortgage or land acquisition.
With title insurance, if the title is vested other than as stated in the commitment or policy, the company is liable for loss or damage sustained by the insured regardless of negligence. Liability under a title insurance policy is strict liability, as opposed to liability under a title opinion, which is based upon negligence. In the event there is litigation that attacks the title as insured, the insurance company is responsible under its policy to respond and to provide counsel at its expense. This is true even if the adverse claim is unfounded. Obviously, if title insurance covers the transaction, there is a definite advantage to all the parties. A title insurance policy affirmatively insures against loss or damage sustained or incurred by the insured if the title is other than as stated in the policy; (a) by reason of any defect in, or lien, or encumbrance on the title; (b) by reason of marketability of title; or (c) because of lack of right of access to and from the land.
In the case of a mortgagee policy, there is additional insurance against loss or damages resulting from the invalidity or unenforceability of the lien of the insured mortgage upon the title, as well as a loss resulting from the priority of any lien or encumbrance over the lien of the insured mortgage. A title opinion excludes any opinion as to the validity or authenticity of the mortgage. Also, unless loans are protected by a lender’s policy and underwritten by are liable title insurer, they are generally unable to sell in the financial market place. The potential buyer of mortgages in the secondary market, as mentioned, will almost always insist on the protection of title insurance.
When comparing the value of a title opinion to a title insurance policy, the financial responsibility of the author of the opinion and of the insurer of the policy should be considered. It is unusual for a law firm to carry professional liability insurance in excess of $1,000,000.00, and it may carry a lesser amount. Title insurers, in general, have greater financial ability to respond to a loss. This is particularly true of the larger national title insurance companies. As a result of recent amendments to La. R.S. 9:5605, a claim against the author of a title opinion for professional liability must be brought within one year from the date of the opinion or one year from discovery of an error in the opinion, but in no event later than three years from the date of the alleged act, omission or neglect. Under prior law, a purchaser would have had one year from the date of discovery of the malpractice in which to make a claim. There was no time limit of three years. By contract, there is no limitation on the ability of an insured to recover for loss under a title insurance policy as long as the insured retains some interest in the insured estate. Title insurance should be required on all real estate transactions.
What is Eagle Coverage and what are the advantages of Eagle Coverage?
First American Title Insurance Company’s EAGLE Policy —- also known as the ALTA/CLTA Homeowner’s Policy of Title Insurance —-provides title coverage for owners of one-to-four family residences, including condominiums. The post-policy coverages automatically included in the EAGLE Policy offer the highest level of protection available to the nation’s growing family of homeowners.
What’s more, the EAGLE Policy never expires, even when the homeowner no longer holds title. No policy offers a broader, more comprehensive, more reassuring range of coverages for the homeowner—that’s why the EAGLE Policy has become the industry’s standard of care.
Many of the coverage’s, including post-policy coverage’s, included in the EAGLE Policy were developed as First American “firsts,” as the company continues the tradition of innovating ways to protect people and their property.
Take a look at the coverage’s automatically included in the EAGLE Policy.
POST-POLICY Protection for Covered Risks
Several important risks are covered on a post-policy basis. This means that some defects in title that did not exist at the time the insured purchased the property, but are now asserted by others, are covered.
These post-policy covered risks involve cases in which someone other than the homeowner claims to own an interest in the title; or has rights affecting the title arising out of leases, contracts, or options; or claims to have rights affecting the title arising out of forgery or impersonation; or has an easement on the land; or has a right to limit the insured’s use of land; or in which the title is defective.
The following are just a few examples of this post-policy protection:
The homeowner is covered when someone forges the insured party’s signature to a deed or mortgage in an effort to sell or impose a lien or restriction on their home.
This coverage protects the homeowner if, after his or her purchase, someone else builds a structure (excluding boundary walls and fences) which encroaches on the homeowner’s land.
POST-POLICY Cloud on Title
Coverage is provided when the homeowner’s title is clouded because someone recorded in the land records a document containing the legal description of the homeowner’s land, whether by mistake or in a specific effort to cause the insured harm.
POST-POLICY Averse Possession
Coverage is extended to a home owner when someone claims to have the insured’s title arising out of someone else’s continued use and occupancy.
POST-POLICY Easement by Prescription
The homeowner is covered in the event another party claims to have the right to use a part of the insured’s land as an easement because of continuous use over time.
The EAGLE Policy expands access coverage to include, for the first time, actual vehicular and pedestrian access to and from the land, based upon a legal right. The access coverage traditionally provided by title insurance was tied to a legal right of access and did not include actual access. The EAGLE Policy affords the type of access protection most needed by homeowners.
BUILDING PERMIT AND ZONING VIOLATION
Coverage is extended to a homeowner who is forced to remove or correct existing structures that were built without a building permit or that violate an existing zoning law or zoning regulation. The zoning coverage even extends to boundary walls and fences! The original EAGLE Policy’s coverage in this area was tied to forced removal, not forced remediation. Because we have found it far more likely that a homeowner would be forced to correct a building permit or zoning violation than to actually remove the structure, the coverage has been expanded in the Second Generation EAGLE Policy to specifically include forced remediation. The homeowner is covered for losses up to $25,000 (after a small deductible) for building permit violations and forced remediation of zoning violations, and up to the full Policy Amount for forced removal of structures due to zoning violations.
The homeowner is covered where subdivision laws have been violated prior to the homeowner’s purchase and, as a result, the homeowner is unable to obtain a building permit, is forced to correct or remove the violation, or is unable to complete a sale or loan transaction. The Second Generation EAGLE Policy continues to provide homeowners up to $10,000 (after a small deductible) for protection against this risk—a benefit which homeowners who obtained our original EAGLE Policy have found most valuable.
ENCROACHMENT BY BOUNDARY WALLS AND FENCES
The homeowner is covered if he or she is forced to remove a boundary wall or fence because it encroaches onto a neighbor’s land, onto an easement, or over a building set-back line. Previous policies excluded boundary walls and fences from this type of coverage. We have found that the encroachment of boundary walls and fences onto neighboring land is far more likely to occur than the encroachment of other structures and , therefore, have determined to provide the homeowner protection of up to $5,000 (after a small deductible) for these types of encroachments.
RESTRICTIVE COVENANT VIOLATIONS
Coverage is provided for violations of restrictive covenants occurring before the homeowner acquired the land if the homeowner is forced to correct or remove the violation or if the homeowner’s title is lost or taken because of the violation. Examples of such violations would include the following, if not permitted by the applicable restrictions: (1) additional buildings; (2) types of roof material; (3) color of home; (4) number of stories; and (5) types of fencing. While these coverages have been available by endorsement for some time, they were never provided automatically until our original EAGLE Policy. The Second Generation EAGLE Policy expands the coverage in this area from that provided in the original EAGLE Policy by eliminating the deductible that applied to a portion of this coverage.
Some coverages may not be available in your area of transaction due to legal, regulatory, or underwriting considerations. For further information, please contact your First American representative.
Another benefit expanded…
Coverage amounts continue to increase annually under the EAGLE Policy, and First American will increase the policy by ten percent of the original amount in each of the first five years! This helps homeowners cover increases in the value of their property by raising the limit of insurance protection.
The first line of one of the conditions in the EAGLE Policy contains this unprecedented statement: “This policy insures you forever, even after you no longer have your title.” All other policies terminate when the homeowner gives up title to a property and no longer has liability under title warranties made to a buyer or lender—but not the EAGLE Policy. It is paid for just once, but lives forever!
Now, living trust coverage includes not only the trustees of a trust, but the beneficiaries as well. This important expansion of a benefit recognizes the growing popularity of living trusts as well as the concerns of trustees for those who will succeed them in the ownership of real property.