What You Need to Know About Property Insurance

Title insurance guarantees that the title for newly purchased or newly financed property is free from the problems of hidden liens and claims. It is different from other types of insurance because it protects against possible past occurrences rather than future events. When problems are found with the property title, the defects must be fixed (cleared) before the property can be legally transferred to a new owner. If later there is a lawsuit over ownership of the property because the title search was faulty, the title insurer pays the legal fees and any settlement amount.

Types of Insurance

There are three types of title insurance:

1. Lenders' Policy (issued only to mortgage lenders). This type of policy does not cover the owner's interest in the property. The initial policy limit is the amount of the mortgage. This limit decreases each year, and disappears when the loan balance is paid off.
2. An Owner's Policy protects the owner's interest for the full purchase price of the property. Most sellers pay for this policy as part of their obligation to deliver a clean title to the buyer. The owner's policy insures:
   • That the title is free from all defects, liens and encumbrances except those listed as exceptions in the policy or those excluded from the scope of the policy's coverage
   • Losses and damages suffered if the title is unmarketable
   • Loss if there is no right of access to the land

   The policy limit on an Owner's Policy is usually the purchase price paid for the property. The coverage is in effect as long as the insured or heirs retain an interest in the property. One premium is paid at the time of the closing.

   If the property owner later refinances, they will be required to purchase a new title insurance policy that protects the new lender from any encumbrances that may have arisen since the original purchase of the property. In a refinancing situation, the owner should not need a new Owner's Policy since the one issued when they first bought the property protects them as long as they or their heirs have an interest in the applicable property.

3. A Construction Policy can be purchased when land is being developed for the first time, as the land is likely to have had prior owners. A title search will uncover any existing liens, and a survey will determine the boundaries of the property being purchased. If the builder fails to pay subcontractors and suppliers, title insurance covers the new owner against any lien on the property.

Title Search

A title search has to occur before a title insurance policy can be issued. Title search companies conduct direct searches to determine ownership and encumbrances on a given parcel of land or property. Completed title searches are then subject to title examination and underwriting.

Direct Search

Under this method, the searching party is hired by the prospective land purchaser to study county records (grantor-grantee index or tract index) or title records.

Title Plant Examination

This method is a form of direct search where a title agent or insurer reviews the information available in its own title plant. A title plant consists of copies of county and other public records that affect land and property ownership. The records are organized to display all items affecting a given parcel in one spot.

Title Examination

Once all records and transactions applicable to an identified parcel of property are found, the information is sent to a title office. Typically, the packet of information includes relevant sales documents, name searches, tax searches, lien placements, etc.

The title officer's duty is to review all of the material and write an opinion on who validly owns the property, whether any defects affect that ownership and what steps should be taken to rid the property of any identified defects.

Title Underwriting

After the title examination is completed, an underwriter reviews the information and decides whether it is appropriate to accept or reject the property for title insurance.

When no defects are identified, a decision to provide coverage is clear. When defects are found, the underwriter is responsible for deciding whether the defect(s) is/are serious enough to bar issuing title insurance.

Title Defects

Title insurance protects a new property owner against the financial consequences of receiving a flawed property title. These flaws, or defects, are situations that affect the marketability of a title, complicating the goal of assuring that a real property transaction includes a title with clear, legal ownership and without third party claims. Identifying problems is critical to a title search. Here is a list of some instances that are considered defects.

• Adverse Claim Issues-Problems arising from claims by third parties, usually about unpaid work or services
• Estate Administration Errors-defects caused by issues that affect a deceased party's property
• Forged Instruments-invalid deeds, mortgages, etc.
• Fraudulent or Illegal Actions-usually involving fraudulently acquiring property
• Incompetent or Improper Parties-transactions where one of the parties does not qualify as legally competent
• Incomplete/Pending Judicial Proceeding-These defects are caused by court-related proceedings that may not be resolved/addressed at the time a transaction takes place
• Lack of Full Disclosure-material information about the property that was not disclosed to the prospective buyer:
  • Miscellaneous Errors and Situations
  • Records Errors-defects involving mistakes with documents or similar issues
  • Tax/Assessment Administration Errors-defects that are directly related to tax and/or assessments problems
  • Unauthorized Parties-transactions involving parties that act outside their implied or explicit scope of authority

Curing Defects

Unfortunately, handling defects can often be expensive, time-consuming and complicated. Methods for curing defects/clearing titles vary according to the type of defect involved. Methods may include filing a title lawsuit, arranging property transfers or paying outstanding liens.

In any case, it is prudent to secure the help of an expert, such as attorneys with expertise in real estate or tax law to assist with curing defects.

Do you still have questions about the property that needs special handling? Talk to an insurance professional at Williams Insurance about your needs and make sure that you have proper protection.