Title Insurance – The Basics And Beyond
Virtually every California real estate buyer (as well as their lenders, and frequently owners of lesser estates in real estate, such as leaseholds, and their lenders) obtains title insurance. Most get a basic form of coverage. However, extended coverages are available, often at moderate fees. This article will briefly explain some of the basics of title insurance coverage, and discuss some of the additional coverages available.
Why You Buy It
A purchaser of California real estate takes title to that property subject to claims and liens that are:
(a) a matter of public record,
(b) ostensible, i.e. discernible from inspecting the property; or
(c) known to the purchaser
Title insurance is obtained because matters of public record, item (a) above, can be difficult to identify. Real property may be subject to liens from a variety of taxing authorities, judgment creditors, environmental agencies, workers performing services of improvement to the property, and mortgage lenders, which include equity line of credit lenders. Beyond this, property may be conveyed in a number of ways, such as incident to a divorce, lawsuit, through a probate proceeding, and the like. In fact, the record consists of every document recorded with the state of California since its exception, since even liens that have been paid off remain part of the record. Thus, discerning the state of record title is not for the faint of heart. In its most basic form, title insurance assures a buyer that the record state of title, item (a) above, is as reported in the policy.
Title insurance is different from other kinds of insurance. It does not insure against acts occurring after the date of issuance, unlike a casualty insurance policy. It only insures against problems in existence on the date of the policy. It does not expire as long as you own the property.
What You Get
The most basic form of coverage assures that you will take the title which the title company reports as the public record. The policy insures against damages resulting from “any defects in or lien or encumbrance on title.” Defects in the title include such matters as the lack of capacity of a grantor in the chain of title, or an off-record grant.
For residential purchasers in urban areas, this may be sufficient. Such property has generally been reviewed by a number of regulatory agencies. (The subdivision process which applies to developers and in particular condominium sellers is particularly regulated.) Furthermore, you may be quite familiar with the property you are purchasing, at least from the standpoint of knowing whether there are tenants or adjacent property owners with a potentially adverse claim.
What You Are Not Getting
You are not getting any assurances about off-record matters such as would be disclosed by an inspection (item (b) above). For example, you are not assured against a tenant’s claimed right to occupy your property. You are not assured that the property was lawfully constructed and conforms to zoning requirements. You are not getting any assurance that your building does not encroach on your neighbor’s property, nor your neighbor’s building on yours. (In fact, I have often wondered how purchasers know for sure that the property they think they are buying conforms to the legal description they see in their title insurance policy. The legal description is obtuse, frequently referring to other recorded documents, and rarely contains an address. The map that may or may not be attached does not form part of the policy.) There are very few assurances one receives of a physical nature.
And of course, you remain responsible for claims you create or know about, even if omitted from the title policy’s list of exceptions.
Expanded Residential Coverage
Traditionally, the basic form of residential title insurance was provided by the California Land Title Association, usually abbreviated as CLTA. This provided coverage against defects in record title. A broader form of coverage was available by obtaining an American Land Title Association, or ALTA, form of title insurance. These assured against certain off-record defects such as encroachments. A survey is required in order to obtain such a policy. In order to provide assurances regarding the physical condition of the property, necessary to assure against claims based on encroachments, or non-record tenants, a physical inspection was also necessary. These policies could get expensive and may not have been necessary in all situations.
Over the last several years, several major title insurers have begun to offer expanded residential owners’ coverage. Different companies have given these different names, but they are essentially an ALTA residential policy with further coverage. Uniquely, they include coverage for certain post-policy matters, including:
(a) subsequent forgery – either a forged deed conveying the property, or a forged deed of trust encumbering the property,
(b) construction by a third party which encroaches on the insured land,
(c) transfers to the owners’ estate planning trust. Such transfers are common
and might otherwise terminate title insurance coverage,
(d) forced removal of an existing structure because it was built by a previous owner without a building permit,
(e) loss due to inaccuracy in the map attached to the policy.
These policies usually contain increases in the policy coverage over time, to account for appreciation. They may cost an extra 10% of the title insurance premium. Because we regard this cost as nominal in relation to the increased coverage, I am inclined to recommend such increased coverage in almost every case.
Endorsements are used to expand insurance coverage or reduce exclusions or exceptions. The extended form of residential title insurance described above would tend to supplant many of the endorsements that had become common to expand coverage. If such a policy is not being obtained, it is very common for homeowners to expand their coverage with what is known as a CLTA 126.1 Homeowner Endorsement which provides coverage for loss from lack of right of access, mechanics’ liens, encroachments, zoning violations and the like. There are similar endorsements for condominium owners, which also add coverage against loss from failures to separately assess taxes. For that matter, condominium purchasers obtain a condominium policy which specifically indemnifies from loss from prior CC&R violations, assures that the condominium was validly created and that the easements and common areas are properly defined. Additional endorsements are available to protect against inflation.
Commercial Title Insurance Endorsements: Even Further Beyond
The world can get quite interesting when commercial property is involved. Some of the available policy endorsements protect against loss from:
(a) a violation of CC&Rs
(b) existing encroachments from adjoining land onto the insured property, or from the insured property onto adjoining land,
(c) lack of access that is practical and usable,
(d) certain identified improvements, such as those with a specified address, not being located on the insured property, and that the attached map shows the locations and dimensions of the use of the insured property,
(e) two or more separately described parcels not being contiguous, so that if they have been assembled and developed jointly, the owner will be assured that there are no third party rights to interfere in between the parcels,
(f) parcels being separate tax parcels, so that there will be no risk of a tax sale
(g) failure to conform with the Subdivision Map Act,
(h) failure to comply with zoning requirements, including parking restrictions,
(i) the property’s building encroaching on an easement,
They may further provide that dispositions. of ownership interests in the owning entity do not terminate the policy despite the fact that they may terminate the entity from a legal point of view.
There are a number of specialized endorsements for lenders on these transactions, including assurances that the loan is not usurious, that the variable interest rate on the loan is enforceable and that future advances will be covered.
There is a vast array of title insurance products beyond those described above. There are litigation guarantees for those bringing quiet title actions to identify all those who should get notice. There are trustee sale guarantees for those buying from a foreclosing trustee. There are guarantees that pertain to mechanics’ liens, judgment liens, mining claims and mineral rights. In fact, there are more than 75 separate, specific endorsements for a basic residential CLTA policy. Thus, the ability to obtain peace of mind for any particular matter of concern exists. Though some of these assurances may be pricey, some may be surprisingly inexpensive.
And even beyond this, custom drafted one-of-a-kind endorsements are available. Title insurers are bookmakers, and if they consider a bet reasonable, they will make it. Because they are relatively sophisticated, they may accept a risk which a buyer may not choose to. Accordingly, if there is an element of a transaction which you as a buyer find troubling, or you as a seller find problematic in its impact on marketing your property, you may be able to find a title insurance company to solve that problem at an acceptable cost. It is important to know that you have such options.