For those of you who question whether an owner’s policy of title insurance is a waste of money, please remember that examining title is still an essential component of due diligence investigations. Real estate investments are usually significant transactions, whether for individuals or businesses. If you are focused on protecting your financial interests, a careful search of public records to determine the current owner of the property (and any disputes about that ownership) is a prudent step to take to protect your investment.
While title insurance is priced based on the amount of coverage provided (typically, the purchase price of the property), title search is usually priced based on the amount of work required to produce the search report. A title search involves an expert review of many sources, including land records, municipal records, court dockets, and others. A title search is a relatively small cost to pay to confirm a seller’s right to sell the property and identify liens to be released before closing. The title search will also identify easements and other agreements of record that give third parties rights to use the property or restrict the use of the property. However, a title search will not surface errors in public records, undisclosed liens or fraud, all of which would typically be covered by title insurance.
Title insurance protects against financial loss from defects in title, including legal fees incurred defending your title. You will need to decide whether the benefit of having your potential damages covered by insurance is sufficient to proceed with the investment in an insurance policy. If you have a mortgage lender, title insurance companies will generally give a very substantial discount for the simultaneous issuance of both a loan policy and an owner’s policy. Purchasing title insurance will also protect you from any errors in the title search.
The cost and value of title insurance has been in the news with President Biden’s announcement in his State of the Union address that the Federal Housing Finance Agency (which oversees Fannie Mae and Freddie Mac) would revive a pilot a program that removes the requirement for certain lower-risk refinancing loans purchased by Fannie Mae to have a title insurance policy in place or an attorney title opinion letter that meets Fannie Mae’s requirements. [1] The program is vehemently opposed by many industry groups, including the American Land Title Association (ALTA). ALTA similarly opposed Fannie Mae’s 2022 decision to accept attorney opinion letters as an alternative to title insurance.[2] Pending federal legislation – the Protecting America’s Property Rights Act (H.R. 5837, S. 2687) – would require title insurance on mortgages purchased by Fannie Mae and Freddie Mac.[3] The loan policies of title insurance that are the focus of these recent policy developments only protect the mortgage lenders, leaving it to homeowners to decide whether to purchase their own owner’s policies of title insurance. Because title insurance protects against fraud (and given the simultaneous issue discount when obtaining the loan policy required by most lenders), we recommend title insurance for most owners.
Because a title search is often ordered in connection with a request for title insurance coverage, some people focus too heavily on whether there will be title insurance coverage for a title defect (versus whether a defect exists at all). While title insurance mitigates risk, it does not cure title defects. For example, suppose your title search reveals there is an access easement that cuts through a portion of the building you are considering for purchase and the title insurance company is willing to provide insurance over any forced removal of the building due to exercise of the easement rights. Is that insurance coverage enough for you or do you want to walk away if the seller cannot relocate or terminate that access easement? Similarly, suppose your proposed use of the property would breach a restrictive covenant of record and the title insurance company is willing to insure against the risk of enforcement of that covenant. Is that insurance coverage enough for you or do you want the seller to obtain an amendment or termination of the restrictive covenant?
Title insurance merely provides coverage for financial losses that result from title defects, as well as coverage for the legal costs that arise from title claims. Title insurance is not title. For those owners who would prefer to pay the occasional damages arising from title defects than pay title insurance premiums for every acquisition, we recommend ordering and reviewing a title report or abstract to determine if any title defects exist that would affect your planned use of the property. Doing a title search is critical for prospective purchasers, regardless of whether you choose to purchase title insurance.
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[1] https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Title-Acceptance-Pilot-FAQs.pdf
[2] https://darroweverett.com/attorney-opinion-letter-advantages-risks-title-insurance/
[3] https://www.congress.gov/bill/118th-congress/house-bill/5837
