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What is Title Insurance and why you should Know

One of my client’s recently asked me if they should be concerned about Title Insurance, which surprised me as many buyers don’t concern themselves with the “provisos” of title insurance. The common believe is that if they are getting a title insurance policy before closing, they are protected and that the attorney will take care of it.

They will be protected, but from what? Just as property insurance might exclude water damage to a stamp collection in the basement, for example, or exclude the value of fallen 100 year trees that don’t fall on a roof, title insurance also has exclusions. To ensure that buyers get “good, marketable title” to property, as well as enough time to make that determination, buyers should insist upon (in the purchase agreement) a “title commitment” being delivered within a short time after signing the contract.

The “title commitment” is a contract by the insurance company to enter into an insurance contract with the buyer, whereby the title insurance company will guarantee good title, subject to exceptions it finds upon a title search of the property (e.g., easements and liens having been filed against the property).

Buyers should always insist, as a condition to closing, that all liens discovered by the commitment be removed at closing. Buyers will typically have a hard time insisting on utility easements or other similar restrictions of record being removed. However, if buyers have an early chance to review these items (via a title commitment), they can evaluate whether or not same will adversely affect the property they are purchasing, and exercise a right to terminate the contract if there are items that will adversely affect the buyer’s use or value of the property, that the seller won’t cure before closing (assuming such a right to terminate is in the contract).

Buyers should also insist, as a condition to closing, that the “standard exceptions” be removed at closing. The following six items are automatically excluded from coverage (the “standard exceptions”), unless the buyer requires otherwise:

The “gap exception” excludes from coverage matters that show up after the filing of the Commitment, and prior to closing;

The “claims not shown by public records exception” excludes coverage for claims or interests that are not recorded (an unrecorded easement, for example), that are discoverable by inspecting the land or inquiring of those in possession;

The “survey exception” excludes from coverage facts that a current survey would disclose, unless such facts were otherwise discoverable in the public records;

The “mechanic’s liens exception” excludes from coverage, protection against claims of materialmen or laborers for work done/materials furnished that have not yet been filed;

The “rights of others in possession exception” excludes from coverage claims of persons other than sellers who exercise possessory rights against property (e.g., tenants or “squatters”); and

The “taxes and assessments exception” excludes from coverage taxes and special assessments that are a lien, but not yet due.

It is very customary (especially in commercial transactions) for buyers to be entitled to have the standard exceptions removed… on one condition. They have to ask. Seldom is it volunteered in a seller-oriented form contract, or offered (without asking) by a title agent. The survey exception is easily removed by a new ALTA survey, or update of a relatively recent ALTA survey. The other standard exceptions are typically removed upon the seller signing form affidavits prepared by the applicable title company.

The moral of the story for buyers of real estate (residential and commercial)?
Have a real estate lawyer draft or review your contract, BEFORE you sign it, to ensure that you have: (1) the right to receive a title commitment and survey, (2) the right to have the standard exceptions removed, (3) the right to review and object to adverse title/survey matters, and (4) the right to terminate the contract if the seller won’t cure survey or title matters that adversely affect the use or value of the property you are buying.