Title Snafus and You

Helping clients understand the complexities of title insurance keeps potentially small legal issues from snowballing.

September 16, 2015

Your client is under contract to buy a condo. The seller's disclosure statement mentions: "The deeded parking stall is space #8, but all present and previous owners have been using space #3." The transaction closes smoothly, but afterward, your client receives a letter from another owner notifying her that the parking space she's using isn't hers. Your client notifies her title insurer, who denies coverage because space number eight was insured by the policy, her use of #3 was not insured, and the issue was disclosed by the seller. As a result, your client is left to address the issue at her own expense. A lawsuit will most likely be filed unless a compromise between the affected unit owners can be reached. Your client is left wondering why you didn’t help her catch this in the first place.

As you can see, it's important for home buyers to be aware of title insurance matters during transactions. And while it is not your role as a real estate practitioner to offer advice about specific policies, it is helpful if you can point out issues that clients need to investigate further. After all, the seller’s disclosures may affect your client’s title insurance coverage for future claims. Here we clarify eight common misconceptions that consumers and real estate professionals may have about title insurance.

1. Title insurance only insures "clear title." Policies typically cover defects, liens, or encumbrances on titles. But, depending on the form, they may also cover losses related to access, building permits, subdivision of the land, zoning, land use, encroachments, setbacks, easements, damage to structures, and supplemental tax assessments.

2. Title insurance covers matters shown in the policy. If an item is listed in Schedule B of the policy, any loss arising from that item is exempt from coverage. For example, if Schedule B of the policy lists a roadway easement in favor of the owner of the adjacent property, any dispute or loss arising from that easement is not covered by the policy.

3. Title insurance guarantees a property is free of liens and clouds against title. Title insurance is not a guarantee. It's an insurance contract, indemnifying the insured for actual loss arising from matters covered under the policy’s terms. Not everything is covered. For example, if an insured person, before closing, knew of an unrecorded roadway easement in favor of her neighbor, the policy would not cover loss arising from the easement.

4. If a title issue is discovered, the title insurer must fix it so escrow can close on time. The title insurer has the right and obligation to investigate the claim, even if it was tendered under time constraints imposed by a pending escrow. The title insurer is not required to fix the problem so escrow can close on time, nor is the insurer liable for loss arising from delay or loss of the sale.

5. The title insurer won't do anything if there's no coverage under the policy. In cases where there's no coverage for a claim, the title insurer has the right, but not the obligation, to address the claim and the insured has a duty to cooperate.

6. The title insurer will clear title if a covered title problem is discovered. The title insurer is not required to clear title. If a claim is covered, the title insurer has options it can exercise, such as 1) attempting to fix the problem; 2) filing a lawsuit; 3) negotiating a settlement with the insured or a third party; or 4) paying the insured’s compensable loss.

7. Only one title insurance policy is paid for at closing. If the property is purchased with a loan, two title policies are usually paid for at closing: an owner's policy and a loan policy. The owner's policy insures the person or entity that acquired title and the loan policy insures the lender.

8. Refinancing a loan does not require a new title insurance policy. The lender will generally require a new loan policy insuring the refinance mortgage. Sometimes an endorsement to the original policy or other arrangements may be made to reduce the cost of insuring the refinance mortgage.

Aimee Hui is an attorney with Boss Law Firm APLC in Honolulu. She can be reached at: ahui@bosslawfirm.com.