Most real estate transactions involve title insurance. Every transaction should! Despite the expense, and the fact that title insurance companies may be very, very profitable, potential losses associated with title defects, for owners and lenders, make title insurance essential.
Title insurance policies issue, generally, on American Land Title Association (ALTA) forms. Policies are issued to owners and lenders. There are standard and extended coverage policies for owners and lenders, as well as an HO—homeowners—policy and a policy for leasehold interests.
A standard owners or lenders policy insures against matters of record, i.e., interests which exist because of a document recorded in the County Recorder’s office. These include claims that someone else owns your property, that another lender’s deed of trust was recorded before yours, or that an undisclosed, recorded easement traverses your property. The coverage is basic, and less expensive.
Extended coverage insures access, and if a survey is obtained, it also insures against encroachments. It costs more, but if there are any meaningful risks with respect to legal/physical access or encroachments, you need a survey and extended coverage. (By the way, a survey reveals improvements belonging to others which are located on your property and your improvements, which are not entirely inside your lot lines.)
The HO policy has become, effectively, the standard policy for residential transactions. Arizona Department of Real Estate forms refer to it, and it’s hard to imagine a good reason not to use it when you are buying a home
Title insurance policy endorsements are also available. They’re often essential, whether they are purchased with a property acquisition or at a later date. For example, if zoning matters when you are buying a property, the money spent on a zoning endorsement pales in comparison with the problems created by a zoning issue. And if you have placed your properties in a revocable trust, you need an endorsement to cover the properties because the ownership has changed.
Owner’s policies are purchased for the sales price of the property, generally. The policy limit is the maximum amount of money the insurer must pay, but need not pay more than the actual loss. Lender’s policies are for loan amount, but the insurer never pays more than the lesser of: (a) the policy limit; or (b) the outstanding balance.
If you have a problem with your property—whether it’s your neighbors’ wall, sitting in your backyard (real case), a gas pipeline running in an undisclosed easement on your property (real case), or undisclosed deed restrictions which limit your roof height to 12 feet (real case)—you should be thinking about title insurance. And if it’s your wall in your neighbors’ backyard (real case; other side), you need to be focused on the insurance.
Too often, too many people take title insurance issues for granted on the front end. If a transaction does not involve a escrow agency—almost always, a company which makes most of its money selling title insurance—there will be no title insurance. And even if a policy issues, it may be on an inadequate form, or it may lack appropriate endorsements. In a form-filled world, it often feels like “just more paper.” It’s not!
On the back end, when an issue arises for which coverage may be available the policy needs to be considered. In many cases it will allow for an easy, inexpensive resolution.
This piece was adapted from materials used in a recent Mesch, Clark & Rothschild presentation concerning real estate, finance, and construction issues.