Title Insurance; are you protected?
In the acquisition of real property, it is customary to obtain Title Insurance for both the purchaser as well as any mortgage lender. The amount of insurance for the Purchaser is usually only the purchase price, primarily because it is obtained by the Seller as a guaranty of title and the Seller wants to limit the his costs associated with the sale. On the other hand the premium for insurance for the mortgagee is a cost to the Purchaser, measured by the amount of the mortgage loan. What if the Purchaser has intentions to improve the property by a substantial amount, perhaps with a subsequent construction loan to be ultimately wrapped into subsequent mortgage financing? Under those circumstances it may be appropriate to increase the amount of initial title insurance coverage to include the anticipated value of the improved property.
Many documents associated with real estate purchases including title insurance commitments and policies include complex language that may not be readily understood by the usual Purchaser or Seller. One such provision has recently been the subject of controversy. Included with the “exclusions” portion of a policy was language that provided that coverage would not extend to an encumbrance of record. In the case at hand, an encumbrance that was of record had not been disclosed by the Seller, and indeed, the Seller may not have been aware of it. Importantly, the encumbrance had not been identified by the title examiner prior to the issuance of the policy of Title Insurance. After the sale the purchaser sought to recover damages under the policy. However, an appellate court denied the claim ruling that because the encumbrance was “of record” under the contract of insurance, the title insurance company was protected by the contractual terms of policy and coverage did not extend to protecting the purchaser from that encumbrance.
One may legitimately ask, under the circumstances, what good is Title Insurance?