With the growth of the secondary mortgage market and planned unit developments, virtually all residential real estate transactions involving a mortgage now involve the use of title insurance.
Title insurance provides protection against defects in title to a particular property and protects the insured from any future claims to the property made by another party due to circumstances that occurred prior to the issuance of the policy. It is a contract of indemnity issued by the title insurance company.
Title insurance companies provide insurance in two ways – a Mortgagee’s Policy and an Owner’s Policy. The title insurance which the client is required to purchase for the lender is a Mortgagee’s Loan Policy. It provides protection to the lender for its lien interest in the property. It does not afford any coverage or protection to the owner of the property. Therefore, it is necessary for the owner to obtain either an attorney’s opinion regarding title or an Owner’s title insurance policy to protect their interest in the property and assure them that any future sale of the property will not be hindered by title objections that originated before their ownership of the property began. The decision to have an attorney examine title and render an opinion or to purchase an owner’s policy is affected by, primarily, two considerations.
The first consideration is the cost involved. Depending upon whether or not the attorney charges by the hour or on a flat fee basis for the title opinion, the cost of that opinion can vary widely. On one extreme, these fees can be quite high if the charges are hourly, the property is abstract, and the abstract is a lengthy one. On the other hand, the fees can be quite reasonable of the property is torrens title. Title insurance premiums will not vary in this way, but are based upon the value of the property. Furthermore, because the client will be purchasing a loan policy as required by the lender. He or she will be eligible for what is called “simultaneous issue rates” for the owner’s policy. In the typical residential transaction, the simultaneous issue rates make the cost of an owner’s policy equal to or less than the cost of an attorney’s opinion. A reissue credit, a premium reduction given because there is or was a title insurance policy issued on the property before, can also save money. A copy of any previous title insurance policy must be submitted to the title company before the abstracting information is examined and the commitment issued to receive a reissue credit.
The second consideration is the difference in coverage between an attorney’s opinion and owner’s title insurance. An attorney’s opinion assures the client that the title to the property is in certain person or entity subject to stated exceptions – typically easements, covenants, restrictions, mortgages, mechanic’s liens, and judgment and tax liens. Also, matters outside the scope of the examination, including real estate taxes and assessments, parties in possession, access to the property from a public street. Matters which would be disclosed by an accurate survey, zoning laws and building codes and mechanic’s leins not filed as of the date of certification of the abstract, are excepted or excluded from the opinion rendered. An owner’s policy of title insurance will offer the same “coverage” offered by an attorney’s opinion and more. The standard ALTA owner’s policy also insures against lack of access to the property from a public street, mechanic’s liens not of record at time of closing, and, assuming that the title insurance company conducts the closing and records the documents which result, the title insurer covers any title defects arising in the “gap period”. That being the period of time between the effective date of the title commitment, which is also the date of the certification of the abstract, and the actual date the closing documents were recorded at the county. In light of its broader coverage and competitive cost, title insurance is usually the best opinion for the typical residential transaction.