Title
Insurance, the Whys and Wherefore
Title insurance plays an important role in most real estate transactions, from the simplest home purchase to development of a regional multi-use facility. All too often, buyers, sellers and brokers are called on to make complex title decisions without fully understanding what title insurance is, and what it isn't, which benefits it provides, and which it does not. This article is intended to briefly address some of these issues in a straightforward question and answer style.
What is title insurance?
A title insurance policy is a contract under which the insurance company agrees to indemnify and defend an insured up to the face amount of the policy, if certain specified defects in title arise. A title insurance policy is not an absolute representation that title is "clean," and that no liens or encumbrances exist.
Why is title insurance important?
In order to provide the buyer and the lender with assurances regarding title to the real property being acquired and/or financed, it is necessary to conduct a search of the public real estate records. While this search could be done by anyone (and in many states, this function is performed by attorneys), in California, it is left to title insurance companies. Delegating this responsibility to a title insurer benefits both the seller and buyer, as it relieves the seller of the obligation to make representations of title, with the potential for liability if his representations are incorrect. It allows a buyer and lender to receive assurances of title from a licensed, regulated, fiscally strong company, rather than a seller who may move, die or be without sufficient assets to address the problem.
What is a preliminary title report?
A preliminary title report is a document prepared by the title company setting forth the state of title which it is prepared to insure. The preliminary title report will identify the current record owner of the property, the property=s legal description and the liens and encumbrances which the title company will assert as exceptions to coverage. The preliminary report is not insurance, and may not be relied on by the recipient. Instead, it is simply an offer by the title company to provide coverage under particular terms and conditions.
What should a buyer do upon receipt of the preliminary title report?
Upon receipt of the report, the buyer must carefully consider all exceptions to title, and ask that any items potentially effecting the buyers use or the value of the property be deleted. For example, a title search may disclose an easement which allows an adjoining landowner rights of usage on, or passage over, the property. If the easement impairs the buyer's proposed use, the buyer may wish to terminate the transaction.
What are the types of title policies?
The two principal forms of title policies are the California Land Title Association (CLTA) policy and the American Land Title Association (ALTA) policy. Very generally, the difference is that the CLTA policy only provides very limited insurance against defects, liens and encumbrances which are not part of the public record, while the ALTA policy includes greater coverage against several (but not all) Aoff-recordAmatters. For example, encroachments on to a neighboring property should be covered under an ALTA policy, but not under a CLTA policy. Since an ALTA policy is more expensive and may require a survey, it is not always the best choice.
What coverage is provided under a CLTA policy?
A CLTA owner's policy insures the buyer against damages arising from the following matters: (i) the property not being vested in the buyer=s name; (ii) the existence of recorded liens which the title company fails to list as exceptions to title; (iii) various title defects, such as forged documents, fraudulent transfers, or transfers by bankrupt or incapacitated persons; (iv) unmarketable title; or (v) lack of access to the property. In addition, a CLTA lender=s policy insures against the unenforceability and priority of the lender=s security interest. CAUTION: The CLTA coverage is subject to various exclusions and limitations, which should be reviewed with legal counsel.
What coverage is provided under an ALTA policy?
The ALTA policy provides the same coverage as the CLTA policy plus protection against (i) mechanics liens and assessments; (ii) items disclosed by a survey, such as the correctness of a legal description and encroachments rom a neighboring property; and (iii) many unrecorded liens and encumbrances, but not all. (For example, an ALTA policy would not cover an unrecorded lease where the buyer knew of the lease but failed to tell the insurance company.) CAUTION: Each title company issues its own version of the ALTA policy, with coverage that may be different from that discussed here. The only way to confirm the adequacy of the insurance being purchased is by a careful review before the policy is issued.
Which title policy is best for a home buyer?
For a purchaser of a one to four family residential dwelling, the best policy may be an ALTA Residential Plain Language Extended Coverage Policy, or ALTA-R. Not only is the policy much easier to read and understand than the traditional ALTA policy, but the coverage is much broader than is otherwise available to a residential owner under a CLTA policy. Additionally, no survey is required. Like an ALTA policy, the ALTA-R policy covers many"off record" matters, and certain additional issues specific to homeowners. Various title companies offer ALTA-R coverage under different names, such as the Eagle policy (Guardian Title) and ALTA+ (Commonwealth Land Title). These policies are competitively priced, costing not much more than a CLTA policy.
Who pays for title insurance?
Allocation of title costs is a matter of negotiation between the parties. The customary practice in Southern California is for the seller to pay for a CLTA policy for the buyer, and for the buyer to pay any costs associated with upgrading to an ALTA policy or obtaining a lender=s policy. Imposing this cost on the seller is justified, since it relieves the seller of the potential liability associated with having to represent the state of title. CAUTION: Even with title insurance, a seller is still obligated to disclose material information in his or her possession which may adversely effect the value of the property.
How much does title insurance cost?
While the cost of title insurance is not regulated and will vary by insurer, most title companies price their products competitively. Each company is required by law to publish a rate schedule, which can be obtained before a company is chosen. As a very general guide, $200,000 of ALTA coverage will cost less than $1,000, with a lender=s policy costing another $350; $500,000 of ALTA coverage will cost approximately $1,600, with a lender=s policy costing another $650; $1 million of ALTA coverage will cost approximately $2,700, with a lender=s policy costing another $1,100.
How long does title insurance last?
Once the premium is paid, protection under the policy will last as long as the insured owns the property. The coverage may even continue after a sale, such as where the owner sells the property and carries back a note. Coverage may also continue to protect persons who receive the property by operation of law (such as by inheritance ). CAUTION: The policy may not continue upon a transfer to a trust or partnership, without an additional endorsement, even where there is no consideration for the transfer.
