A REVIEW OF TITLE INSURANCE: BASIC VS. ENHANCED COVERAGE

A REVIEW OF TITLE INSURANCE: BASIC VS. ENHANCED COVERAGE

Real Estate Agents, as well as consumers, are generally familiar with title insurance which requires a one-time premium payment to guarantee clear title to property for the duration of the purchaser’s ownership.  Traditional lenders will always require that a policy of title insurance be purchased to insure that there is no loss or claim that could affect the lender’s security interest in the property. Purchasers are also offered the option to acquire additional coverage that protects their ownership in the property.  I am often asked why a purchaser needs title insurance if the lender already requires it.   If there is a defect that precludes the owner from selling the property or a covenant or zoning violation for example, it does not trigger a loss for the loan which must still be paid even though the property may not be readily saleable.

Perhaps the greatest confusion lies with the differences between Basic title insurance coverage and Enhanced coverage.  As I tell my clients, the likelihood of needing to file a title insurance claim is not great, but if there is a loss, it can be extraordinarily costly, just like with any other insurance.  We buy hazard and fire insurance or life insurance not expecting a disaster, but we have it in the unlikely event that we need it.  Basic title insurance pays for the cost of any loss or defense if there is a claim by another party that they have an ownership interest in the property.  It covers losses if there is a forgery in the chain of title defeating ownership or an easement or encroachment limiting your use of the property.  I did the settlement on a transfer in which the daughter had previously forged her mother’s name to a deed and then sold the property to an unsuspecting purchaser who then resold it to our client.  Because of the forgery, there was a complete failure of title ownership. There was no way our title examination could have revealed that information, so the title insurance underwriter paid for all of the losses, which were considerable.

Nevertheless, a complete title failure is very remote.  Enhanced title insurance covers matters that are more commonly seen.  It covers a violation of subdivision law, such as if there is a previously unknown violation of a building restriction line, or set back line such as a well or septic line.  If a structure (other than boundary walls or fence) is required to be removed because it was built without a proper building permit, only Enhanced coverage would protect the consumer.  Additional coverage protects against forced removal of structures or prohibited use of a structure due to a zoning violation.  An extremely significant protection offered by Enhanced coverage protects against loss of title due to a violation of a covenant, condition or restriction occurring prior to acquiring title. Only Enhanced title insurance provides for an inflation clause which automatically increases the amount of coverage at the rate of 10 percent per year, up to a total of 150 percent of the cost of the purchase.  The lender’s  coverage declines as the loan is paid down, so the inflation clause covers any equity and appreciation in the property up to the 150 percent amount.

Finally, Enhanced title insurance will cover matters that occur after the closing on the purchase of the property.  I have had a couple of recent situations where a dispute arose after closing about ownership of parking or garage units in condominiums.  Although the deed included “appurtenant” structures or limited common elements, the sellers in these cases believed that they could separately sell off the storage or parking space AFTER closing.  In my most recent case, the title insurance underwriter accepted coverage and is working to either require that space be vacated and made accessible to the correct owner, or pay for any losses in value due to the controversy.  The coverage for events or claims arising after the settlement is one of the most significant advantages of Enhanced coverage, without which a purchaser could be forced to spend thousands of dollars on legal fees to resolve a claim, even a frivolous one.  Concededly, the cost of Enhanced coverage can be about twenty percent more than the Basic coverage, but the added cost would definitely be worth it in the event of a title claim or loss.

In the event of a title issue, the legal costs alone of correcting or defending against a claim make the policy of title insurance well worth the cost.  Any concerns or questions about title insurance coverage should be addressed to the title company handling the closing.  Just be certain that the title company is issuing insurance through a nationally recognized and financially stable underwriter.

By: James E. Savitz, Esq.

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