Be Aware of the Limitations of Title Insurance Coverage
Are you getting what you’re en titled to?
If you currently own a residence or are buying one, the answer to this question may be no, especially if you haven’t asked the right questions about title insurance.
Unlike other types of insurance which cover future possible losses and involve ongoing premiums, title insurance is a one-time expense and protects against things springing up from the past that might take your home or equity away.
This includes claims by others that they are the true owners of your property, recorded liens, past judgments attaching to your property and other title defects that would be apparent in the public records.
There are plenty of things not covered by title insurance, however. Your title policy doesn’t cover future fraudulent schemes to mortgage your property without you even knowing about it. Basic title insurance also won’t cover most border disputes or claims by a neighbor whose driveway has been encroaching so long on your property that he or she can claim what’s known as a prescriptive easement. There are title insurance policies that will cover you in case their is a boundary dispute, but these policies require a survey--and that will cost you dearly.
Despite all these limitations, title insurance is a necessity, said Michael M. Silver, real estate partner at Encino law firm Grayson, Givner, Booke, Silver & Wolfe. “It’s a major mistake not to get it. You want someone constantly confirming your ownership.”
One of Silver’s recent cases involved a client who bought a property and several months later was notified by a creditor of the former owner that there was a judgment lien affecting the property.
Because the title company missed this judgment when it searched the public record, the new owner was covered for all legal expenses and the title company was responsible for removing the encumbrance.
Robert A. Weissman, senior partner at law firm Weissman & Weissman in Encino, has worked on similar cases.
He represented a title insurance company that had to make good on its policy to the recent purchaser of a $300,000 home in Ventura County near Westlake Village. The previous owner had taken out a $55,000 revolving line of credit secured by a deed of trust that was recorded but not picked up by the title company or disclosed by the seller. Eight months after the sale, the lender on this line of credit sought to foreclose. The new owner was stunned that this could happen, but the loan has been paid off by the title company.
Most people who are buying or refinancing their residence really don’t pay too much attention to their title insurance policy, Weissman said. Not all title companies charge the same price for their policies, he said. “There’s some shopping buyers can do.”
Also, Weissman advised, homeowners should familiarize themselves with the policy they’re getting. Schedule A is the insuring clause. This protects the policy holder against defects in title, liens, encumbrances, problems with the marketability of title or forged deeds predating the policy. Schedule B lists what the policy doesn’t cover. These include governmental regulations, eminent domain and defects “created, suffered or assumed” by insured. “That’s the most litigated part of a title policy,” Weissman said.
Before a policy is issued, property owners also get a preliminary title report explaining what a search of the public records has turned up and what kind of coverage the title insurance company is willing to offer.
Sellers usually pay for a standard residential owners policy in Southern California. The buyer pays for the lender’s policy. Most residential buyers get what’s known as the standard policy under decree by the California Land Title Assn., or CLTA, in Sacramento. Mortgage lenders usually require their borrowers to pay for an ALTA lenders policy, which has basically been formulated by the American Land Title Ass.
Commercial property owners or residential borrowers who have a ranch, or an oddly shaped property, usually get the ALTA owners policy that requires a land survey--and can cost several thousand dollars.
Edward Beierle, senior vice president and general counsel for Continental Lawyers Title Co. in Universal City, said that for a $300,000 home, his company charges a one-time fee of about $950 for a CLTA owners policy. An ALTA residential policy, without the survey, costs about 25% more. On a typical purchase where the borrower takes a $240,000 loan on a $300,000 purchase, the borrower will pay about $550 for the lender’s ALTA policy.
What do you get for your money?
Title policies cover the costs of defense and indemnity, said Alan Kheel, partner at law firm Reznik & Reznik in Sherman Oaks. The insurance company pays the costs of defending a property owner or lender from any title claims covered by a policy. The title company also indemnifies the policy holder if any of those claims eat into the policy holder’s investment in the property. Policy holders, however, are only indemnified up to the value of the policy. Property owners can get an inflation clause which will protect them when the property increases in value, but there’s an added cost.
Another frustration for many property owners is learning that “90% of the residential title issues aren’t covered by title insurance,” Kheel said. Disputes over borders aren’t usually covered unless the property owner has paid for a survey and extra coverage.
Buyers, can pick whichever insurance company they feel most comfortable with, said Claudia Queen, vice president at Stewart Title in Glendale. Purchasers can shop around for the best price, she said, but it’s better to shop for the best service. The title company is not just your insurer, but also is responsible for recording your purchase- and loan-related documents properly.
Future policy holders should also find out who their title officer is and request a list of what are known as title policy endorsements that provide the insured with extra coverage--sometimes at no extra cost.
One particular endorsement that purchasers should ask about relates to coverage of mechanics’ liens that may pop up in the public record within 90 days of a property sale. Without this endorsement, home purchasers can find themselves responsible for work on the house contracted by the previous owner.
