There is little risk in presuming that the majority of homeowners rate their property as their most important asset. Paradoxically, homeowners likely know more about their car insurance than the insurance purchased for the purpose of protecting legal title to their property. Just like no one would want to purchase a car subject to someone else’s car loan, neither do people want to purchase property subject to the former owner’s mortgage or other liens. A homeowner may avoid such problems by obtaining a title insurance policy.
Familiarity with title insurance is usually nothing more than a nuisance charge on a closing statement. Yet, the essential function of a title insurance policy is to provide coverage ensuring the homeowner has good title to the property. If a covered title defect is found, the policy pays the homeowner for actual loss under the terms of the policy, and no more.
As with any insurance policy, it is paramount to understand what is covered. Basically, title insurance is a two-step transaction: the title commitment and title policy. The commitment consists of three parts: Schedule A, Schedule B, and the Conditions.1 Schedule A lists the name(s) of insured(s), the amount of coverage, a description of the insured property, and the effective date. Schedule B-I provides preliminary requirements to a policy being issued. Schedule B-II lists exceptions to coverage. The commitment also has Conditions found on the commitment cover. Following closing, the policy is issued based upon the commitment if the requirements have been met.
A typical title insurance policy contains certain exceptions concerning title risks that cannot be discovered or evaluated relying solely on public real estate records. The survey exception removes coverage for boundary line disputes. The purpose of the survey exception is to make it clear that the policy does not protect against matters outside a review of real estate records. In other words, matters that would be discovered by a surveyor are not covered by a title insurance policy unless a survey is obtained prior to closing.2 Typical language for this exclusion, found on Schedule B of the policy, states:
This policy does not insure against loss or damage (and the Company will not pay costs, attorneys’ fees or expenses) which arise by reason of: Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises.
Essentially, the title company puts the risk of not surveying the property on the insured. The property owner can limit this risk by either obtaining a survey or arranging for the removal of the survey exception.
Removing the survey exception – which can be accomplished by performing a survey per the policy conditions or paying an additional premium – exponentially expands the protection provided by a title insurance policy. For example, when the survey exception is removed, coverage is expanded to include3:
1. A survey’s failure to show an encroachment of a policyholder’s fence on a neighbor’s property.
2. The incorrect placement of lot line which causes a policyholder’s cellar door to open on a neighbor’s property.
3. The incorrect placement of a power line easement 50 feet from the house as opposed to the true of measurement of 5 feet from the house.
4. An incorrect statement of the amount of acreage.
5. The encroachment of an insurance holder’s barn onto the neighbor’s property.
Whether you are working with a realtor or purchasing a for sale by owner property, it is important to understand your title insurance policy and the exceptions to coverage. Review your title insurance terms and exceptions to ensure your property is protected. If you have questions about your title insurance policy and what it covers, make sure you call your attorney.
1. This form is available at the ALTA website: http://www.alta.org/forms/ (last visited June 5, 2017).
2. Joyce Palomar, Title Insurance Law, § 7.02.
3. Title and Escrow Claims Guide, 2nd Ed., § 12.3.16 (2013).