Why Title Insurance is Necessary

Every property has a history, yet some parts of the story may be missing. That's why title insurance is important to the transaction.
By: Al Heavens: RealtyTimes
My plumber called me a few weeks ago with a problem that I found easy to answer.

It seems that his vacation home (a manufactured home permanently affixed to a site in the foothills of Pennsylvania's Pocono Mountains) was found to be about two feet into his neighbor's property.

The neighbor was selling his land, and since he had owned the property for 50 years, he had just paid for a survey. The neighbor wanted a lot more money than my plumber was willing to pay for about 10 square feet of additional land.

Do you have title insurance on the property, I asked.

My plumber paused.

"Yeah, I took an owner's policy when I bought the property," he said. "I'd paid cash but since I have one on my house, I figured it was a good idea."

And what a good idea, even though my plumber had completely forgotten about the policy.

According to the American Land Title Association, about 25 percent of all residential real estate transactions have issues with the title. Most are resolved before closing; however, any claims or challenges that arise after closing will be paid by the policy as long as the owner and his or her heirs retain an interest in the property.

My plumber had an owner's policy, which is typically issued in the amount of the property's purchase price. An owner's policy protects the buyer. A loan policy protects the lender, but, as I've said, the plumber paid cash for the land. What if a loan had been involved? The title association says that in a typical residential transaction, the title policy that is often required by the mortgage lender will not safeguard the rights and interest of the home buyer. Therefore, a separate owner's policy is recommended.

A loan policy assures the lender of the "validity, priority and enforceability" of its mortgage, protecting the lender's security interest in the property. A loan policy is issued in the amount of the loan. Liability decreases as the mortgage debt is reduced.

The major difference between title insurance and other kinds of insurance is this: Other insurance types assume a particular risk and provide financial indemnity if the risk occurs. Title insurance tries to prevent loss by eliminating risks created by title problems that arise from previous situations.

This emphasis on loss prevention means that title insurers pay fewer claims than other lines of insurance. But to accomplish this, preventing loss and clearing title issues is expensive and labor intensive.

How much? The land title association says that expense ratio for title insurers averages 90 percent, while the expense ratio for property and casualty companies is less than 30 percent.

What is involved in a title search? Researchers look into official records for mortgages, judgments, street and sewer system assessments, special taxes and levies and other matters.

Information about a piece of property and any liens against it may be filed in different ways. They can be filed under the seller's name, the owner's name, by lot number or street address. To reduce the complexity of the search process, many companies have created "title plants," which contain nearly all the information that are found in official records but are indexed in a consistent manner – for example, by name or lot number.

Thanks to these title plants, the title can be searched and title insurance issued within 24 to 48 hours in most metropolitan areas.

My plumber's problem with his neighbor was easily solved to the satisfaction of both parties. It would have been better had a more thorough title search been done at the start, however. One example of a problem that is better handled at the beginning of the process goes like this:

The title search discloses that two acres that are being purchased were once part of a five-acre tract. A previous deed to the five acres included a restriction on the use of the property to a single-family dwelling and the usual outbuildings. The other three acres already had a single-family dwelling, so there was a question about whether the buyer could build on the other two acres.

The title company helped the buyer obtain releases from the appropriate parties to remove the problem and allow the houses to be built.

Not all title problems have happy endings. A buyer was about to close on a property when a search found pipeline, utility, flood and road easements across the property that would have restricted his use of the land. The sale was canceled.