It seems that nary a month passes for most of us without some insurance premium expense. We are constantly faced with obtaining insurance – sometimes mandatory, and other times voluntary – to cover most aspects of our life (homeowner’s; life; auto; health; dental; malpractice; disability; and the list goes on….).
Insurance is simply the mitigation of risk. When buying real estate, one specific type of available insurance is title insurance. If you are borrowing money from any financial institution to purchase real property, a lender’s policy of title insurance is required. An owner’s policy of title insurance is also available. But what actually is title insurance?
In North Carolina, title insurance insures the condition of the title or ownership to a certain parcel of property. A prerequisite to obtaining title insurance is that a title examination be conducted by a licensed North Carolina attorney. Based upon the title search, the examining attorney submits a title opinion to a title company for the issuance of a title commitment (sometimes known as a “binder”). Schedule A of both the title commitment and the underlying title policy (which will be issued after closing, once the closing attorney has updated their initial title search and has recorded the deed, any loan documents, or any other closing instruments) covers the basics (policy number; name of insured; which individual or entity title is vested in; a description of the property covered; etc.).
Just as important as what is covered by the underlying policy is what is not covered – the “exceptions”. With a title commitment, the Exceptions are separated into two sections: Schedule B-1, covering the Requirements (that the title premium must be paid; certain lien waivers are provided; any existing loans are paid off; etc.), and Schedule B-2, covering the Exceptions (ad valorem property taxes for the current year not yet due and payable; restrictive covenants, easements, and other matters of record; etc.). With the title policy, any and all remaining Exceptions from Coverage are contained in a general Schedule B.
Unlike the many other types of insurance, one major benefit of title insurance is that a buyer/borrower only has to pay a premium one time – usually at closing; there is no reoccurring, periodic premium charges for as long as one owns the insured property. Upon the sale of that property, that policy will terminate (i.e. it is not assignable to the new buyer). If a seller subsequently purchases a new property, a new title policy would be required. Likewise, an updated title policy is required upon a refinance of an existing property. Reissue rates (or discounted policy premiums) may be available.
During ownership of the property, if any covered matter is called into question, when a proper claim is made the title company (without payment by the owner or lender of any deductible) will step in and either pay up to the coverage amount or hire counsel (at the title company’s expense) to defend the claim.
One standard exception that will usually be included in an owner’s policy (and may be waived, upon request, in a lender’s policy) is the “survey exception”, which states something similar to: “encroachments, overlaps, overhangs, unrecorded easements, violated restrictive covenants, deficiencies in ground, lack of access, violated plat building lines, or any other matters not of record, which would be disclosed by an accurate survey and inspection of the land,” significantly limits the value of a title policy. While many clients try to save closing costs by not obtaining a current and accurate survey of the property being acquired, the cost of a new survey is usually such a small fraction (often under $1,000, when the real estate cost is many multiples of $100,000) of the overall purchase price and/or loan amount that it pales in comparison to the value added in having affirmative title insurance coverage over such matters. In the commercial context, the cost-benefit analysis between the survey cost – even for a more detailed, ALTA survey – and the purchase price is even more pronounced (i.e. several thousand dollars for a new survey, based upon a purchase price/loan amount of hundreds of thousand or even millions of dollars).
Remember that lender’s coverage terminates when the underlying loan covered is paid and satisfied. Many banks have affiliated title companies, but state law prohibits a lender from requiring a borrower to utilize a specific title company.
Numerous endorsements to title polices are available (for additional fees), and often various endorsements are required by lenders. A discussion of the intricacies involving title endorsements are beyond the scope of this post.
As with any insurance policy, one should actually read the commitment and issued policy. During the closing process or at the closing, if a buyer or borrower has questions about items disclosed in a title commitment, ask. After all, you are paying for coverage – make sure you know what it is that you are buying.