Your Deed is Not Your Title


Just Because You Received A Deed, It Doesn't Necessarily Mean You Own The Property Free And Clear Of All Other Claims And Interests.

Consider the following:

Mr. and Mrs. Smith's closing went beautifully. The sellers left for their new home in California and the Smiths moved into their new home that same night.

However, about two months later, Mrs. Smith called her attorney's office in a state of panic. She had just received a notice from the town Tax Collector that a three-year-old tax bill on the property had not been paid. The Tax Collector told her that the town had a lien on the property and that even though the bill was originally against a former owner, she and her husband, as the new owners, were now responsible for payment.

"You told us we owned the house free and clear except for our mortgage. You should have discovered this lien when you did the title search on the property. What are you going to do to take care of this?"

When the attorney checked the recording information provided by the Tax Collector, it was clear that the lien had been improperly indexed and that the attorney was not at fault for failing to discover it. Nevertheless, this was the type of risk that would be covered by the Smiths' title insurance policy, provided they had purchased an owner policy when they bought their home.

Unfortunately, they had purchased only a policy insuring the lender and had waived their option to purchase an owner policy. Their only choice was to pay the amount of the lien and attempt to recover the payment from the sellers.

Title insurance policies can be purchased for lenders (called a mortgagee policy) or for owners (called an owner policy) or for both. Because the lender is relying on the borrower's property as security for repayment of its loan to them, lenders almost always require title insurance to protect themselves against loss as a result of a defect in the title to the property. The premium for this policy is just one of several expenses connected with the loan which the lender requires the borrower to pay as a condition of making the loan to them. However, even though the borrowers pay for the policy, they are not the insured. As new owners, the borrowers can be insured only by purchasing an owner policy as well.

But won't the title insurance company pay off the lien under the lender (mortgagee) policy anyway since it is already obligated to protect the lender?

Not necessarily. A title insurance policy is only a promise to protect the insured against the risk of loss. In other words, the Company is not obligated to pay its insured until the insured has sustained or incurred a loss or damage as a result of the title problem. Most lenders require the borrower to invest 10% to 20% of the cost of the home. This is known as the owners' equity. For example, if the new owners purchase property for $200,000 with a $160,000 mortgage loan, their equity in the property will be their $40,000 contribution towards the purchase price. Therefore, the first $40,000 of loss due to a title problem would be borne by the owners. The title company can refuse to pay any claim until the owners' equity is exhausted. In our example above, the first $40,000 of loss caused by the title problem is paid by the owners because the lender (mortgagee) policy they purchased insures only the lender for the amount of the mortgage ($160,000). However, had the Smiths purchased an owner policy, they would have coverage for the full purchase price of their home ($200,000), and they would be able to look to the title insurer to resolve the $40,000 loss. In addition, if the Smiths had purchased an owner policy at closing, they would have received a lender policy at no additional cost.

Doesn't an attorney's certificate of title provide a purchaser with the same protection as an owner policy?

No. An owner policy does more than just report on the status of the title. It also protects against many unrecorded or improperly recorded items such as lost or forged deeds, deeds by minors and incompetents, misindexed deeds, and over 50 other problems which cannot be discovered in the search of the title.

Furthermore, if there is a problem with the title, the purchaser does not have to look to the attorney for compensation. He or she can file a claim against the title insurance company instead.

If the fair market value of the purchaser's home increases after an owner policy is issued, is the owner's protection limited to the face amount of the policy?

With respect to owner policies which insure the title to owner-occupied residential real estate, we add (at no charge) an inflation protection which increases the amount of insurance under the policy during each of the first five years.

When does the coverage provided by an owner policy end?

The one-time premium payment for an owner policy protects the insured owners for as long as they own the property. In addition, the coverage may continue even after the owners sell the property, should the insured have liability to the purchaser of the property by reason of the warranty covenants in the deed to the purchaser.

What about attorney fees and other expenses incurred in the defense of the title insured by the owner policy? Does the Company pay for these too?

One of the most important protections afforded by an owner policy is that the Company has a duty to defend the insured's title against defects covered by the policy. When the Company receives notice of a claim under one of its policies, it evaluates that claim to determine its validity and whether it is covered by the policy. If it is determined to be a valid claim, the Company will either seek to resolve the underlying defect or defend the insured's title, all at no expense to the insured.