Don't Be A Tightwad - Cough Up The Cash For That Owner's Title Insurance Policy

Homebuyers looking to shave off a few bucks in closing costs by foregoing the purchase of an owner's title insurance policy(1) are cautioned against it in a recent column by real estate lawyer Harvey S. Jacobs in The Washington Post:

• Many homeowners mistakenly think that because the settlement lawyer did the [title] search and is providing a lender's policy, that the title must be clear. Why waste extra money on an owner's policy? This is an extremely shortsighted view for several reasons.

• First, even though a prudent settlement lawyer will do an exhaustive title search, that search may not uncover the very real risks present in these days of fraudulent foreclosures and/or forged documents.(2)

• Second, the lender's policy does not provide any protection for the owner in the event of a successful claim.

• Third, part of the benefit in a title policy is that the title insurance company assumes the legal costs to defend any claim. Without an owner's policy, the owner must bear his own legal costs to defend any claim, no matter how frivolous.

• Fourth, the marginal cost of buying an owner's policy, when a lender's policy is being issued (a so-called "simultaneous issue") is quite small. You do not pay full premium for owner's and lender's policies when they are being issued simultaneously.

• Finally, an owner's policy may entitle you to discounts off future title policies if you subsequently refinance, or for your buyer if you sell your home within [a certain period] of obtaining your owner's policy.

For more, see Title insurance is essential in protecting your investment.

See also Title Insurance: What Risks Does It Protect A Property Owner Against?

(1) Believe it or not, there are a few real estate agents out there who have been known to give this 'sage' advice to their clients and customers when buying a home, especially where mortgage financing is not needed and the buyer is paying "all-cash." When screening for a real estate agent to work with for a home search, it may not be a bad idea to ask the agent whether it's OK to pass on paying for an owner's title insurance policy as a way save on closing costs, and see how the agent responds. If the agent says it's a good idea to pass on getting the owner's title policy, it may be best to pass on working with that particular agent.

(2) Title losses arise from three principal sources:

• Errors in searching the records,
• Errors in interpreting the legal effect of those records,
• Facts outside the records, known as “off-record risks."

Among the off-record risks, or "hidden hazards," that a title insurance policy protects a homeowner and mortgage lender against are:

• (1) false personation of the true owner of the land, (2) forged deeds, releases, etc., (3) instruments executed under fabricated or expired power of attorney, (4) deeds delivered after death of grantor or grantee, or without consent of grantor, (5) deeds to or from defunct corporations, (6) undisclosed or missing heirs, (7) misinterpretation of wills, (8) deeds by persons of unsound mind, (9) deeds by minors, (10) deeds by aliens, (11) deeds by persons supposedly single but secretly married, (12) birth or adoption of children after date of a will, (13) surviving children omitted from a will, (14) mistakes in recording legal documents, (15) want of jurisdiction of persons in judicial proceedings (ie. where a court lacks subject matter jurisdiction over a case, or where it lacks personal jurisdiction over a defendant, for example, failure to properly serve a defendant with legal process), thereby leading to judgments that are either void or voidable, (16) discovery of will of apparent intestate, (17) errors in indexing, (18) falsification of records, (19) capacity of foreign fiduciaries, (20) claims of creditors against property sold by heirs or devisees, (21) deeds in lieu of foreclosure given under duress, (22) ultra vires deed given under false corporate resolution, (23) easements by prescription not discovered by a survey, (24) deed of community property recited to be separate property, (25) errors in tax records (ie. listing payment against wrong property), (26) deed from a bigamous couple, (27) defective acknowledgements (ie. notary public screw-ups when notarizing legal documents, (28) federal condemnation without filing notice, (29) descriptions apparently, but not actually, adequate, (30) corporation franchise taxes, a lien on all corporate assets, (31) erroneous reports furnished by tax officials, (32) administration of estates of persons absent but not deceased, (33) undisclosed divorce of spouse who conveys as consort's heir, (34) marital rights of spouse purportedly, but not legally, divorced, (35) duress in execution of instruments.