Title Insurance Demystified

by Rich Vetstein on August 11, 2009 · 21 comments

in Massachusetts Real Estate Law, Mortgages, Title Defects, Title Insurance

title-insuranceIn my opinion, title insurance is an absolute necessity in every real estate conveyance transaction. Even though I’m an experienced real estate attorney, when I purchased my own house, I obtained owner’s title insurance. With the instances of title and bank paperwork problems on the rise, I prefer not having to worry about hidden title defects which could affect my ability to refinance and sell my house down the road.

The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement. Closing attorneys and title insurance companies need to do a better job explaining the excellent benefits and value of title insurance, so consumers don’t have the perception that it is just another junk fee.

What Is Title Insurance?

Title insurance is policy of insurance (technically an indemnification policy) protecting homeowners and lenders from actual financial loss in the event that certain covered problems develop regarding the rights to ownership of property. While Massachusetts closing attorneys search and certify each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by most every public mortgage lender in the U.S., and are typically paid as part of closing costs.  Owner’s policies are optional and paid for by home buyers. I will discuss owner’s policies in this post.

Title Defects:  What Does An Owner’s Policy Of Title Insurance Cover?

The recent foreclosure paperwork mess and the Massachusetts high court ruling in U.S. Bank v. Ibanez are perfect examples of the importance of title insurance. Thousands titles in Massachusetts coming out of faulty foreclosures were rendered defective because of the Ibanez ruling. Those without owner’s title insurance were left to fix the title problems on their own at great expense. Those with title insurance, by contrast, were able to sell their property with the title insurer issuing “clean” policies over the defects.

Here are some other real world examples of how title insurance protects you. I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had an owner’s title insurance policy which allowed her closing to go forward as scheduled. I represented a young family who was dismayed to learn that the property they were about to buy was subject to the claim of a long-lost heir of a prior owner. The title insurance company agreed to file litigation against the “missing” heir, and clear the title. If title insurance was not available in these transactions, the deals would have been canceled altogether, or the closings would have been delayed by months if not years until the issues were resolved, if at all.

In addition to undischarged mortgages and the sudden appearance of unknown or missing heirs claiming an interest in the property, an owner’s policy of title insurance also covers a myriad of other types of title defects, including:

  • Faulty foreclosures
  • Forged deeds or impersonations
  • Incorrect legal or boundary descriptions
  • Recording errors

There is also a new extended or enhanced coverage policy available from all major title insurance companies which covers:

  • Building permit violations
  • Adverse possession or prescriptive easements
  • Building encroachments
  • Incorrect surveys
  • Pre-existing violations of subdivision, zoning laws, restrictive covenants.

For a full list of just about every conceivable situation covered by title insurance, please read my article: 50 Ways To Lose Your Home.

How Much Does Title Insurance Cost?

Title insurance is a one-time premium paid at closing and is calculated based on the purchase price of your home. The cost is for standard coverage is $3.65 per $1,000 in home value. Enhanced coverage policies run $4.00/thousand, and provide better coverages (i.e., for boundary disputes) and inflationary protection. These days, we are always recommending enhanced coverage as it’s a better value. When you purchase both lender’s coverage (always required by mortgage lenders) and owner’s coverage at the same time, there is a substantial discount.

Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. That is false. As a former claims counsel for a national title company, I could write a treatise on the different types of title problems I have seen derail closings and drag on for years.

The Role Of The Closing Attorney

The closing attorney ensures that the title examination is done on the property, certifies that the title is “marketable,” and issues the title insurance policy. While all U.S. public lenders require lender’s policies of title insurance, closings attorneys should always recommend owner’s policies for buyers. Attorneys do share in the title premiums generated. However, as I said before, even the most careful title search cannot reveal a hidden title defect that can wreck havoc on any subsequent sale or refinancing of the property.

To borrow from Nike’s old slogan, Title Insurance:  Just Get It.

Please contact me at rvetstein@vetsteinlawgroup.com if you have any further questions about title insurance.

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  • MikeLewis123

    Title insurance is protection against loss arising from
    problems connected to the title to your property. Before you purchased your
    home, it may have gone through several ownership changes, and the land on which
    it stands went through many more. There may be a weak link at any point in that
    chain that could emerge to cause trouble. For example, someone along the way
    may have forged a signature in transferring title. Or there may be unpaid real
    estate taxes or other liens. Title insurance covers the insured party for any
    claims and legal fees that arise out of such problems. Real estate has
    traditionally been a family’s most valuable asset. It is a form of wealth that
    is protected by many laws. These laws have been enacted to protect one’s
    ownership of real estate and the improvements located on the land.
    home sell by owner

    • Danny Monagle

      And the real cost is about 10% of the total you pay. Greedy commissioned sales people take the rest! And they don’t do anything for taking 90% of your money for themselves. I was a loan broker, then a stockbroker with AMEX. Seen all the ruses.

      • Carolyn Benoit

        I realize this is an old thread, but I’d love to show you how much work goes into researching a title, clearing a title, and fixing a title if need be (which the attorneys do when a claim is made). I’ve personally seen these owner’s policies put to good use by saving closings for sellers and defending title, especially with the Ibanez foreclosure issues. Danny, have you ever reviewed or analyzed a 50 year title exam? Once you do, please then tell me you think “they don’t do anything for taking 90%”. No offense, but why does being a loan broker or stockbroker mean you know about property, probate, divorce, bankruptcy and other fields of law that effect title?

  • Homebuyer

    Can you disclose how much the selling attorney shares? News articles on the web suggest 50-90% of the premium. Does the attorney have any obligation to act in the fiduciary duty of his/her client and seek the best title insurance rates?

    • Homebuyer, in Mass, the split is around 70%.  You can ask the attorney for a rate quote. The rates are pretty much the same across the board.

      • Skeptical homebuyer

         How can it be a good deal to buy any insurance where 70% is used up in commission?  Buying tickets from the Mass. Lottery is criticized for being a bad purchase and they take a max of 55%.

        • Skeptical, that’s like saying don’t buy life insurance because the agent gets a hefty commission. The commission is irrelevant and doesn’t affect the value or the coverage of the policy.

          Title insurance is not sold direct in Mass. but rather, sold by attorney agents who subsidize their closing fees because they receive commissions on the title policies. If you got rid of the commissions or reduce them, the attorneys would have to charge much more for closing fees.

        •  That’s like saying life insurance is a bad deal because the agent gets a hefty commission.

          In any event, Massachusetts is an attorney-agent state so title insurance is not sold direct. It’s the way it is here until the state regulates it…

          • Skeptical homebuyer

             That’s why I bought my life insurance from USAA where the agents do not take a commission.  The money has to come from somewhere ; if the agents are making a big commission, then you are paying that much more for insurance that, if the system were structured a different way, would be much less expensive and just as effective.  But like you say, that’s not not the way it works here.  Has anyone tried to start a direct-to-buyers title company is Massachusetts?

          • Massachusetts is one of the lowest title insurance rates in the U.S., lower than other major states such as NY, CA, and FL which charge several hundred dollars more. Same coverage for $500k home in NY runs $1300 more. So there goes your theory….

          • Steve

            This doesn’t make it right. Cut the commission in half and save the homeowner some money. Makes lawyers look greedy

          • Steve, the commissions subsidize the closing fee, so if the commissions go down the closing fee will go up. The profit margin in residential real estate law is relatively low compared to other practice areas. For all the hours and time we put into each deal, we don’t get paid very much actually.

          • ralph

            Before advising clients to buy title insurance, do you disclose that you’re getting a commission?

          • Of course, and it’s on the HUD-1.

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