What Is Title Insurance, Anyway? Part 2- How A Title Policy Protects You (And Doesn’t)
In the first part of the blog post, I explained what goes into a title policy. This part of the blog post discusses how a title policy does and does not protect you.
Coverage Generally
Title insurance policies protect their insured against actual losses resulting from “covered risks,” which generally include: (1) Someone else owns an interest in the insured’s title; (2) someone claims rights affecting the insured’s title because of leases, contracts, or options; (3) someone else claims superior title on account of forgery; (4) someone claims an easement on the property; (5) someone claims a right to limit the insured’s use of the property; (6) title is defective; (7) someone claims a lien or encumbrance; (8) being forced to remove structures other than a fence, due to certain reasons affecting title; (9) lack of a legal right of vehicle and pedestrian access; (10) various building, zoning, or land use regulations and violations; and 11) certain less common situations. Notably, in most circumstances, the circumstance giving rise to a covered claim must have existed at the time of the policy. For example, an adverse possession claim which does not ripen until after the policy is issued would likely not be covered. Likewise, a lien or encroachment based on circumstances arising after the policy would not be covered. The policy insures your title as of the date of your policy.
Not all title insurance policies are identical- some provide greater or lesser coverage, so it is important to examine the specific terms.
Title Insurance For Legal Costs
The title company generally is obligated to pay legal expenses in defending the insured’s title if there is a covered claim. However, that usually means that the title company can choose which law firm to hire to represent the insured. In some situations, title companies will pay the fees of the firm hired by the insured, but this is usually for work done prior to the title company hiring counsel of its own choosing.
Watch For Limitations
Title coverage has limitations. Typically the amount of insurance is equal to the purchase price, or in the case of a policy insuring a lender, the face amount of the loan. In some cases, the insured can purchase a higher amount of insurance. But coverage amounts can also be limited based upon the particular covered risk.
The terms of the policy give the insurer the option to pay a covered loss rather than defend the title. Sometimes the value of a defense is greater than the value of the underlying covered loss, so this is something to be mindful of when strategizing. Title companies have a network of attorneys (usually outside law firms) they routinely hire to handle title litigation on behalf of insureds. In most cases, the title company gets to decide which attorneys are hired for covered matters.
What Title Insurance Isn’t
Many consumers and professionals in the real estate industry mistakenly assume that the title policy is a guarantee of the condition of title. Based upon this mistaken belief, they assume the title company is liable for negligence if the preliminary commitment or title policy omit title matters which the title company should have known about. Title companies generally are only liable under the policy via contractual principles, but they do not owe a duty to insureds to discover or disclose title defects. Suppose, for example, that an insured discovers, after the purchase closes, that there was a recorded easement on the property which was not discovered by the title company. The insured would have a claim for coverage under the policy for the loss suffered by the easement. However, the insured would not be able to sue the title company for negligence or claim damages on the theory that the insured never would have purchased the property if it had only known about the easement. The title company’s liability would generally be limited to the loss in value on account of the easement, under the terms of the policy.
Make Sure To Timely Tender
When an insured discovers a title problem, it is wise to promptly tender a claim to the title company. Even if the claim is not fully ripe to trigger coverage under the policy, it does not hurt, and may provide resources early on to assist with the dispute or negotiating a settlement. Failing to tender a claim can give rise to a defense by the title company that they were prejudiced by not having notice of the claim early on and not having an opportunity to prevent damages.
The lawyers at Beresford Booth have a wealth of knowledge about real estate transactions and disputes and how to protect yourself as a buyer, seller, or lender. We would be happy to assist you in understanding your title insurance policy, seeking coverage, and litigating your title disputes. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.