Why Every Buyer of Real Estate Needs Title Insurance

While title insurance may seem like extra paperwork and added costs, it is an essential element of any real estate transaction.

While title insurance may seem like extra paperwork and added costs, it is an essential element of any real estate transaction. Title insurance can help avoid costly legal issues by protecting buyers and mortgage lenders against defects in title during and after a transfer of property ownership. 

Title Insurance 101

Every real estate transaction must have a clear title to ensure the property is free from liens and other “encumbrances”. This is true whether you are conducting a commercial or residential real estate transaction. Title insurance is a form of indemnity insurance that protects you from suffering financial loss due to issues with the title.

The first step of obtaining title insurance is a title search. In performing a title search, the title insurance company will investigate all of the recorded property transfers, tax liens, easements, and any other encumbrances affecting the subject property. The information is then used to create a title report.

Since title reports are not infallible, title insurance protects against any undiscovered title defects.  If a defect in the title is discovered post-closing, and the title company should have disclosed it in its report, the title insurance company is generally responsible for covering any associated legal expenses and damages. A typical residential title insurance policy covers the following:

• Ownership by another party
• Incorrect signatures on documents
• Forged or fraudulent documents
• Flawed records
• Restrictive covenants, i.e., unrecorded easements
• Encumbrances or judgments against property, i.e., unresolved lawsuits and liens

Many buyers are not aware that title insurance is not available for the purchase of a co-op apartment, since this involves the purchase of corporate shares rather than actual real estate. Nevertheless, most title companies will provide a “Judgment and Lien Search Report” to help buyers learn whether there are any such encumbrances on the shares of a particular co-op unit. These reports are usually provided at a nominal cost as there is no insurance being offered.

Importance of Title Insurance for Commercial Transactions

Given their added complexity, title insurance is particularly important with respect to commercial real estate transactions. Various endorsements are available to protect purchasers and lenders from more than just title defects. For instance, endorsements can cover additional issues, such as zoning concerns and environmental issues. 

While the policy should be tailored to the transaction, the American Bar Association recommends that commercial buyers obtain title insurance policies addressing the following:

• Extended coverage;
• A closing protection letter, with verification of issuance and continued validity; 
• Available and relevant endorsements, such as endorsements relating to 
• covenants; 
• survey issues; 
• minerals and subsurface substances; 
• loss determination; 
• taxes; 
• special use (for example, zoning); 
• special mechanic’s lien coverage; 
• project use; 
• unusual loan document issues (for example, shared appreciation, swaps, re-characterization); and 
• the standard ALTA 9.06 (Restrictions, Encroachments, Minerals-Loan Policy), 
• ALTA 9.2-06 (Covenants, Conditions, and Restrictions-Improved Land-Owner’s Policy), ALTA 28.2-06 (Encroachments-Boundaries and Easements-Described Improvements), and ALTA 35.2-06 (Minerals and Other Subsurface Substances- Described Improvements).

The ABA also recommends that commercial property buyers consider the financial depth and durability of the title insurer. 

Types of Title Insurance

There are two main types of title insurance. Loan policies protect the mortgage lender’s investment should a title defect arise. Meanwhile, buyer’s policies protect the buyer of the property in the event there are problems with the title. 

Mortgage lenders almost always require buyers to purchase a lender’s title insurance policy. The policies are distinct, meaning that property purchasers can’t rely on their lender’s title insurance policy. Accordingly, a lender’s policy and an owner’s policy are often both required to guarantee adequate protection for all parties. Finally, unlike other types of insurance, title insurance requires payment of a one-time premium, which is paid at closing. 

Key Takeaway

Title insurance is invaluable in any real estate transaction as it protects lenders and buyers from financial loss due to defects in the title to the property. Without insurance in place, buyers may have to shoulder the financial burden of unpaid taxes, open building permits, contractors’ liens, and other title problems.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Bruce Feffer, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.