TITLE INSURANCE

Introduction
If you own a house ─ probably your biggest lifetime investment ─ you no doubt have homeowner’s insurance which protects you against fire, flood, theft, etc. What then is title insurance and how does it differ from the former? The answer is that it protects you and the lender (i.e. your mortgage bank or broker) against loss of your home’s value because of liens or encumbrances or defects in the title. As such it is different than other types of insurance. Most insurance protects you against future risks (such as a car accident), while title insurance protects you against past and existing liability that was not caught at the time your house closed.

For example, let’s say the previous owner had $50,000.00 of renovation done on the house, but only paid the contractor $10,000.00. If the contractor filed a $40,000.00 lien on the home and it was not caught at the time of closing, the new owner could be liable for that amount if the contractor took steps to enforce his lien. Title Insurance transfers the liability to the insurer who would pay the $40,000.00 or defend against the action. Since the insurance covers liability that occurred prior to your home purchase, you only pay the premium once at the time of closing, as opposed to home insurance, in which you pay the premium yearly. The coverage protects you for as long as you own the property. (If you refinance your home however, your lender will want a new title insurance policy, since it needs to be protected from the date you originally bought your home through the refinance date.)

Title Search
Prior to your closing, a title search is performed by your attorney or title agent. It involves researching the public records of the specific property for any variances or irregularities associated with it—to insure the property is owned free and clear and that any existing liens or mortgages are being paid off at the time of closing.

In short, the title search determine the answer to these questions:

• Does the seller have a saleable interest in the property?
• Are there restrictions or allowances pertaining to land use? (i.e. real covenants,
     easements, or other servitudes)?
• Do any liens exist on the property which need to be paid off at closing? (mortgages,
      back taxes, mechanic's liens, or other assessments)
• Does the purchaser have access to the land?

For example, there may be back taxes due on the property that need to be resolved before the transfer of title is completed. Easements might restrict your usage of part or the whole of the property. A previous owner may have legally given a neighbor the right to share the driveway, or the city may have a right to strips of the property for putting up power lines, communication lines, water pipes, or sewer pipes.

A title search will disclose all variances that could affect your investment. If defects are discovered, the title insurance company has to decide whether to attempt to cure the problem, insure over the problem or exclude those defects from coverage. If defects are not discovered but arise later, then the title insurance coverage protects you. Examples of such defects might be improperly executed documents from a previous sale or a lien against a previous owner.

The resulting report is called an Abstract or an Abstract of Title. The bank or mortgage company requires it before any loan can be approved.

The underwriter is the entity that authorizes and issues authority for its agents to write title insurance policies. The underwriter assumes financial risk and actually insures the property against insurance defects. Title insurance underwriters agree to defend the owner of the title policy in court should ever any undiscovered legal issues arise with the title. The underwriter may also issue the policy itself. A title agent or approved attorney for the underwriter must qualify with the underwriter and meet very strict standards to remain an agent or approved attorney for any particular underwriter. Note that anyone may do a title search, but the policy won’t be issued unless the search is done by an authorized title agent or approved attorney (or their employees/independent contractors) that the company has confidence has done a comprehensive job.

Regulation
Title insurance is regulated by both the federal government and the state ─ here under the auspices of the Pennsylvania Insurance Department. The state regulates rates while a federal law called the Real Estate Settlement Procedures Act (RESPA) entitles the individual homeowner to choose his/her own title insurance company when purchasing or refinancing residential property. RESPA makes it unlawful for any bank, broker, attorney or seller to demand that a particular title insurance company be used.

Title insurance is mandatory unless you are purchasing the property without obtaining a loan. (i.e. mortgage.) Even in that case, it would be foolish to purchase property without obtaining insurance.

Rates have to be filed with the Pennsylvania Insurance Department. Most title insurance companies (but not all) are members of the Title Insurance Rating Bureau which files rates on behalf of its members (so all members of the Rating Bureau have the same rates). While insurance rates are standardized and depend upon the value of the property, there are two systems–depending whether you use a title agent or an approved attorney.

Title Agency System
Under the title agent system, the premium is larger but inclusive, and includes the cost of the title search, title examination, escrow and settlement services and the insurance risk assumed by the title insurer. (However, there are still fees which a title agency may charge including document preparation, overnight charges, wire transfer and printing documents.)

Approved Attorney System
Under the approved attorney system, the premiums are lower, but each individual attorney charges separately for the title search, title examination, closing, document preparation, etc. While there is no restriction what an attorney can charge, competitive forces keep the overall cost to the buyer about the same as using an agent, with the advantage that he is represented.

Rating Types
Four rating types include: the sale rate, the non-sale rate and the enhanced sale and the enhanced non-sale rate. Refinancing would fall under a non-sale rate unless there is some type of title transfer taking place, in which case you should contact me.

The enhanced rate is a higher rate which covers the house as it increases in value the insurance increases proportionately. You can link to tables showing enhanced coverage through our Links page.

The enhanced rate offers additional coverage designed to provide added title protection:
It includes:

1. Automatic Policy Liability Increases – Coverage increases by 10% of the stated amount of the policy each year for the first 5 years, up to 150% of the stated amount of the policy.

2. Building Permit Violation – Protection against loss if insured is forced to remove an existing structure because it was built by a previous owner who did not obtain a proper building permit.

3. Post Policy Forgery – Protects against forgeries which may occur in the future and cloud the insured’s title.

4. Enhanced Access – Insures that there is vehicular access to the property, not just legal access.

5. Post Policy Encroachment – Protects the insured after purchase of property, if someone else builds a structure which encroaches onto insured’s land.

6. Subdivision Coverage – Provides up to $10,000 of coverage if the insured cannot close a sale, get a loan or obtain a building permit because his land was improperly subdivided prior to purchase.

Click here for more information on the enhanced policy

Other Closing Charges
Other title insurance charges are for endorsements and closing service letters. Either you or your lender may request endorsements to the title policy. For instance, a common endorsement that a lender might request would be survey coverage when no survey is done (this would only be applicable to the loan policy as there is a separate endorsement if the owner wants this coverage). A lender typically requires at least three endorsements that cost $100.00 each, or $300.00 total. The lender also requires a Closing Service Letter which is $125.00.

Caveats
The proliferation of affiliated business arrangements can sometimes be problematic. The realtor pushes his or her lender, and title insurance company. The builder might offer to pay $2000.00 in closing costs if you use their lender and their attorney. Some of these practices (depending on whether kickbacks are involved) may even be a violation of RESPA.

By choosing your own title company, you are choosing an independent third party that is not owned or operated by your real estate agent’s firm or your bank. There is a much smaller likelihood of any conflicts of interest and an independent agent holds no loyalties to the other parties in the transaction.

I have personal experience with an affiliated agent. When my family moved here, we used the company affiliated with our realtor and lender. I wasn’t familiar with the system yet, so I ended up being charged for the enhanced rate, because the agency’s policy was to bill the buyer for the enhanced insurance, unless the buyer specifically declined the coverage in writing. Further, I was charged an additional $90 for a notary and an email document fee that I deem excessive. While the enhanced policy does afford additional protection, my policy is to charge for the enhanced insurance only when requested..

Please visit our Fee and Rate page for full disclosure of fees and charges.