How many times do you get to the closing table to have the buyer question the “optional” title insurance charged to them? And reasonably so. Any buyer doing their due diligence needs to know what they are covered for in case they ever need it. It is important that you be able to succinctly explain to them how the charge is worth avoiding the risk. Here are the high points of owner’s title insurance that I sum up at the closing table.
- Every conventional lender requires that the buyer purchase title insurance for them. Every mortgage lender or bank requires that the buyer purchase title insurance for them as part of his or her closing costs, so this may be a sign that they should purchase coverage for themselves. Claims obviously happen enough that the mortgage lending industry has found title insurance necessary to protect their investment. This is the buyer’s investment too and should protect themselves.
- This is most likely the largest purchase of the buyer’s life. For a typical buyer, this is probably the largest purchase of his or her life and the potential of losing this investment is a frightening thought. If they face a title issue that prevents them from selling their home and they do not have title insurance, they will be out of pocket to hire an attorney to defend the title. The amount paid in owner’s title insurance premium pales in comparison to the retainer one would have to put down to hire an attorney that cannot guarantee a result. If they have title insurance, the insurer may simply be willing to indemnify the buyer and the next title company, and “close over” the issue. If the issue cannot be cured, the insurance company will pay out the value of the policy to compensate the loss.
- Title insurance is a one-time charge. Most borrowers are reassured that this charge for title Insurance is a one-time charge. The insurance covers the borrower for their lifetime and they never have to pay another dime. Should they ever be implicated in a chain of title issue even after they sell the property, they would have coverage.
- Title insurance covers things that attorneys/agents cannot see. I often hear the borrower at the table proclaim something along the lines of, “Isn’t that what I am paying you for?” or “Where I’m from, the attorney (or agent) is on the hook if they miss something in the chain of title”. Yes, the attorney/agent is hired to review the chain and locate any potential encumbrances to reduce the risk of taking over this property, but owner’s title insurance covers title issues that even attorneys/agents cannot see. I always mention undisclosed heirs, fraud, or mis-indexed documents.
For example, suppose the property went through succession and an unknown heir comes forward after the heirs were put in possession. There is absolutely no way the attorney/agent would be aware of this heir. The other heirs may not have even been aware of the heir. Depending on your state law, this heir may still have an interest in the property. Title insurance would cover this.
- Title Insurance Covers Liability Outside of Statute of Limitations or Company Closure. Even if the attorney/agent bears some fault, most states have a statute of limitations or prescriptive period in which you can bring a claim against the attorney/agent. Many title issues are not discovered until the property goes to sell the next time. By then, the statute of limitations or prescriptive period has most likely run. Plus, does the buyer want to have to pay thousands of dollars out of pocket to hire an attorney to sue an attorney/agent and go before an attorney turned judge to determine the outcome? Doesn’t look promising.
Even if the title company has decided to shut its doors by the time an issue arises, the title insurance does not expire.
As a practice, I would recommend reviewing any particularities of each file before closing so you can customize your response. Also, keep on hand some kind of literature or insert that fully explains title insurance. Your underwriter may already have something like this prepared that you can use.