Property is often subject to restrictive covenants limiting use of the property, or easements for utilities and other public purposes. Usually these matters are not considered defects but a part of modern life. They will not entitle the purchaser to cancel the transaction.
The seller must give you marketable title, title that is of such quality as to ensure its ready acceptance by a future purchaser or lender. The seller must correct title defects such as unreleased mortgages or judgments, unpaid taxes, and sewer and water liens.
The settlement agent will order a careful search of the public records to identify documents bearing on the title in question. In our office, an attorney reviews the abstract or summary prepared by the title examiner to determine the legal impact of the various documents. Other companies may rely on title agents rather than attorneys.
A title insurance binder, prepared based on information found in the abstract, commits a title insurance company to insure the transaction. The title insurance binder and the policies issued after settlement represent an insurance company’s obligation to protect the insured’s interest in the property. Title insurance is ordered by the settlement agent so you don’t need to call around looking for it.
The insurance company may choose to insure against loss or damage due to known defects. These include slight surveying errors, judgments against persons with similar names or incomplete notary acknowledgments. Protection against matters that you cannot discover by examining the public records is the most important benefit of title insurance. Traditionally, title insurance has covered matters that happened in the past. Examples are fraud, forgery, missing heirs and clerical mistakes in indexing documents or posting taxes.
More modern title insurance policies, called “enhanced policies” add coverage against post-policy matters such a fraud or identity theft (someone signing your name to a deed or mortgage). They also offer limited coverage against building code violations, survey defects and violation of subdivision ordinances.
The lender will require title insurance to protect the amount of the loan but this does not protect the buyer’s equity. The amount of lender’s title insurance declines as the loan balance pays down. A policy issued to a prior owner does not protect the buyer either. To obtain protection for your growing equity, you need an owner’s title insurance policy. Such a policy protects the equity at settlement, and usually contains an escalation clause increasing coverage as the value of the property appreciates.
We strongly recommend owner’s title insurance and specifically the enhanced policy. The additional premium collected at settlement is usually not significant when compared to the amount of coverage. You pay the premium only once, at settlement, while the coverage continues for as long as you could have liability for title.