Title Policy Coverage: What Is It And What Is It Not?

Fri, 07/12/2019 - 9:55am

WHAT IS A TITLE POLICY? 
One of the single most expensive transactions someone may enter into in their personal lives is often the purchase of real estate. Because of the significant investment involved in a real estate transaction, purchasers and their lenders want to know their investment is safe when it comes to the title of the property or their lien priority. The buyers want to be sure that the correct seller is selling to them. The lenders want to be sure that there are no liens that have a superior interest to their interest. These are the matters that title insurance was designed to be used for. While title insurance does not guarantee that there are no adverse interests in the property, it is a contract of indemnity that can be issued in favor of an owner, lessee, lender or other holder of an estate, interest or lien on real estate. The policy agrees to protect the insured from actual loss because there was a superior interest in the property that was unknown at the time of closing.

What is a policy of indemnity? Indemnity means the title insurer agrees to insure against loss or damage related to the insured’s right in the property. If loss or damage occurs from a covered risk, compensation can be paid to the insured. This would include coverage against items such as other persons claiming an ownership interest in the property. It can also include defects or liens affecting the property that were otherwise not set out in the policy. Lender’s coverage insures the priority and validity of the lender’s lien against the property.  

HOW DO I KNOW WHAT MY TITLE POLICY WILL AND WILL NOT COVER? 
The title company produces a document called the Title Commitment early on in the transaction.  A commitment for title insurance (“Title Commitment”) provides a buyer and lender with terms and conditions for how the final title policy will be issued. An in depth explanation of the title commitment can be found here:https://texasnationaltitle.com/article/understanding-title-commitment

Essentially the title commitment is a report for the buyer (and lender) that discloses how the property will be insured.  This commitment is provided up front so that a buyer has the opportunity to review the commitment during their contractual due diligence period, typically referred to as the option period.   All buyers should review this document in detail to be sure they understand (a) the coverage they are receiving and (b) what, if any, encumbrances affect their property.  
 
WHAT RECORDS ARE SEARCHED TO PRODUCE THE COMMITMENT? 
When a title company is preparing a title commitment only the official public real property records are searched.  The property is examined for deeds, liens, easements, building lines and similar restrictions.  The names of the owners are searched in what is called a general name search to locate things like court cases, bankruptcies, divorces and judgments against the seller.  Only the official public records are searched for a title commitment because that is the search needed to issue a title policy.  

WHAT ELSE COULD BE OUT THERE THAT WOULD AFFECT A PROPERTY? 
Lately we have been seeing an increasing trend in post-closing municipal issues.  Municipal issues (such as open permits, zoning violations or whether or not the buyer will be able to obtain a permit on their property) fall outside of any type of search done by a title company.  Since these items are expressly excluded from title policy coverage they are not searches that are performed by the title company.  Researching municipal issues is a buyer due diligence responsibility and the contract provides for an option period in which the due diligence is to be performed. 

Let’s look at a sample scenario pattern to see how this plays out in real life: 
John is buying a property with the legal description of “The West 14 feet of Lot 11 and all of Lot 12.”  John buys from Sam who has owned this same property since 2013.  The parties close and a title policy is issued.  After closing John goes to the city to obtain a building permit on his property.  What John learns is that this was an illegal subdivision of the lot, meaning it was not done with city/county approval, and now the city is assessing a $5,000 fine for the illegal lot status.  The city also refuses to issue any building permits until the property is subdivided.  John’s idea of building an investment property to sell is completely halted by this issue.  

John is obviously upset by this and wants to file a claim under his title policy.  This is a municipal issue and municipal issues are excluded from coverage in the title policy, meaning the issue is not covered.  Who is John most likely going to go to next about this issue? It is not long before John calls his agent upset about this. 

How do agents protect themselves? To avoid this, an agent should always suggest to their clients that they perform the necessary searches and due diligence to check into municipal, city and county issues.  

The closing teams at Texas National Title are all well versed in the benefits of title insurance. Any time a client has questions about coverage they can be directed to your escrow officer at Texas National Title. We are the experts that you need and the partners that you can trust in all things escrow and title!