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Everything You Ever Wanted To Know About Title Insurance
Part 2

9. If a borrower secures a policy of title insurance at the closing, why should a lender secure its own policy? Alternatively, if a lender secures a policy of title insurance at the closing, why should a buyer purchase a policy?

Like other forms of insurance, title insurance insures only the party named as the insured party in the policy. A lender's policy insures only the mortgagee and, in fact, the amount of coverage given decreases over time as the mortgage is paid down. An owner's policy protects the owner. The title insurance industry customarily issues separate policies to both the owner and the lender. If both are issued at the same time, the premium charged is often a "simultaneous issue" rate, which results in some cost savings to the buyer and lender.

10. Is a title insurance policy a guarantee that title is perfect?

No, a title insurance company will often include in its policy exceptions to coverage dealing with matters affecting title that its search of public records has disclosed. Also, as discussed below, there are a number of standard exclusions and exceptions to coverage. In addition, although title insurance companies generally review title carefully and genuinely believe it to be in the state described in their policy, they also sometimes insure over risks that they consider to be insignificant or unlikely to cause a problem.

11. Against what risks does a standard owner's title insurance policy generally insure? What additional risks are covered by a lender's policy?

A standard owner's policy covers:

  • Failure of title to the property;
  • Defects in or liens or encumbrances against title to the property;
  • Lack of a right of access to and from the property; and
  • Unmarketability of title to the property.

    A standard lender's policy may add coverage pertaining to the invalidity or unenforceability of the lien of the insured mortgage; the priority of any lien or encumbrance over the lien of the insured mortgage; and certain mechanics' or construction liens.

    12. What are the standard exclusions and exceptions from coverage referred to above?

    In general, governmental matters, such as laws, ordinances, regulations (including those pertaining to environmental protection and giving the state a priority claim to real property), and rights of eminent domain are excluded. A title policy does not insure over claims arising out of creditors' rights laws. Matters known by the insured, not known to the title insurer, and not disclosed by the public records are excluded, as are those resulting in no loss to the insured. Anything arising after the date of the policy, or resulting in a loss that would not have been sustained if value had been paid for the property, are also excluded from coverage. This means that title insurance will not cover property received by gift or donation, absent a special endorsement. In addition, claims of parties in possession of the property, unrecorded easements, mineral claims, mechanics' or construction liens not of record, homestead rights, boundary disputes, survey matters, and building and use restrictions not appearing in the chain of title are excepted from coverage in a standard title insurance policy.

    13. Should a purchaser review the non-standard exceptions set forth in a title insurance commitment before closing on the property?

    Yes, because these exceptions could affect not only the purchaser's or lender's ownership or lien rights, but also the extent to which the insured property can be used and enjoyed.

    14. How can non-standard exceptions set forth in a title commitment affect the uninsured party?

    Such exceptions might relate to prior mortgages, competing claims to ownership, or the existence of easements, use restrictions, or reservations, such as mineral reservations. Thus, the value of the property to the purchaser or the priority of a lender's mortgage and the extent to which the mortgaged property has value in the hands of a third party if the lender must foreclose on and resell it could be affected by the existence of such exceptions. Therefore, a prudent purchaser or lender will have the documentation pertaining to non-standard exceptions carefully examined before the closing. Efforts may have to be undertaken to cure one or more of these exceptions. Purchasers and lenders should keep in mind that an appraiser often does not consider title exceptions when evaluating a parcel of property for mortgage purposes.

    15. Are there any special or unusual features in a title insurance policy?

    Like any form of insurance, title insurance is offered and subject to the terms and conditions of the policy, which are contained in the "fine print." That fine print describes when and how claims must be made, sets forth the insurance company's duty to defend, and describes the limits of coverage. Any purchaser of title insurance should be aware of two particularly important terms. First is the standard arbitration provision, which requires any dispute arising under the policy to be submitted to binding arbitration unless the amount of the original policy is in excess of $1 million. Second is a "co-insurance" provision stating that if the insured property is improved, the owner of the property must apply for and receive increased coverage under the title policy or, in the case of a loss, be faced with coverage that is reduced from the original face amount of the policy in a proportion roughly equal to the ratio the value of the property as improved bears to the acquisition cost of the property.

    16. Must title insurance be renewed periodically?

    Ordinarily, no, a title insurance policy need only be purchased once. After that, it continues in force in accordance with its terms, and no further premium must be paid. An owner's title insurance policy even covers the owner, so long as he or she continues to hold the policy, if a claim is made against the owner based on a warranty she or he gives in a deed conveying out the property covered by the title policy. However, some owners' policies contain the co-insurance provision described above under which the owner must purchase additional coverage if significant improvements are made to the insured property or be subject to a proportionate reduction in coverage if a claim is made. A lender's policy of title insurance even covers the lender, so long as it holds the policy, if it succeeds to ownership of the property because of foreclosure or conveyance in lieu of foreclosure. Thus, in an ordinary mortgage loan, a title insurance policy once purchased protects the lender until the loan is paid in full. Coverage does decrease, however, as payments are made on the loan. The use of more sophisticated lending practices, such as revolving credit loans, variable interest loans, can, however, result in an unanticipated reduction in, or even elimination of, a lender's title insurance coverage if special steps are not taken.

    17. Is any protection available against laws, ordinances, or regulations relating to environmental protection?

    Limited protection is in most jurisdictions including Florida available in the form of an endorsement. Such Protection is not currently available to commercial lenders.

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