Titles - Title insurance

Learning Outcomes

This article examines the concept of title insurance within Real Property law. It details the function of title insurance, distinguishes between owner’s and lender’s policies, and explains the scope of coverage, common exclusions, and the insurer's duties upon discovery of a covered defect. After reading this article, you will understand how title insurance protects against title defects and encumbrances not apparent from a title search, enabling you to analyze title insurance issues in MBE questions.

MBE Syllabus

For the MBE, you are required to understand title insurance as a mechanism for protecting purchasers and lenders against title defects. This involves knowing the basic types of policies and the nature of the protection offered. You should be prepared to:

  • Distinguish between an owner's title insurance policy and a lender's title insurance policy.
  • Identify the types of risks typically covered by title insurance (e.g., defects in title, liens, unmarketability).
  • Recognize common exclusions from coverage (e.g., defects known to the insured, zoning issues, post-policy events).
  • Understand the insurer's duty to defend and indemnify against covered claims.
  • Analyze the effective date and duration of coverage.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which type of title insurance policy protects the property buyer against title defects existing at the time of purchase and typically remains effective for as long as the insured or their heirs own the property?
    1. Lender's Policy
    2. Owner's Policy
    3. Mortgagee Policy
    4. Abstract of Title
  2. Title insurance generally protects against:
    1. Defects arising after the policy's effective date.
    2. Losses resulting from zoning ordinance violations.
    3. Physical deterioration of the property.
    4. Defects in title existing on the policy's effective date but not discovered until later.
  3. An owner discovers a previously unknown, properly recorded easement crossing their property six months after purchasing it and obtaining an owner's title insurance policy. The policy did not list the easement as an exception in Schedule B. The title insurer likely has a duty to:
    1. Pay the owner the full purchase price of the property.
    2. Defend the owner against the easement holder's claim and indemnify for actual loss caused by the easement.
    3. Force the easement holder to extinguish the easement.
    4. Do nothing, as recorded easements are excluded from coverage.

Introduction

While a general warranty deed provides covenants of title from the grantor, these promises are only as good as the grantor's ability to pay damages. Buyers and lenders typically seek additional protection against title defects through title insurance. This is a contract of indemnity where the insurer agrees, in exchange for a one-time premium, to indemnify the insured against losses caused by defects in title to real property existing on the policy's effective date. Unlike other forms of insurance that protect against future events, title insurance protects against past, undiscovered defects.

The policy insures that good record title exists as of the policy's date and promises to defend the insured in litigation based on a covered claim. Coverage is typically defined by what is not excluded in the policy schedules.

Key Term: Title Insurance A contract of indemnity protecting the insured against losses resulting from defects in title to real property that existed at the time the policy was issued.

Types of Policies

There are two main types of title insurance policies:

  1. Owner's Policy: Protects the property owner (buyer). Coverage is usually for the purchase price of the property. It remains effective for as long as the insured or their heirs have an interest in the property.
  2. Lender's (or Mortgagee's) Policy: Protects the mortgage lender. Coverage is limited to the amount of the loan. It terminates when the loan is repaid.

A buyer will typically purchase an owner's policy for themselves and be required by the lender to purchase a lender's policy for the lender.

Key Term: Owner's Policy Title insurance policy protecting the property owner against title defects.

Key Term: Lender's Policy Title insurance policy protecting the mortgage lender against loss due to title defects affecting its security interest.

Scope of Coverage

Title insurance generally covers risks that make title unmarketable. This includes defects that exist at the effective date of the policy but are not discovered until later.

Typical covered risks include:

  • Defects in Title: Errors in the public records, hidden defects like forgery, fraud, undue influence, lack of capacity, or defective delivery of deeds.
  • Liens and Encumbrances: Undisclosed liens (e.g., mortgages, judgment liens, tax liens) or encumbrances (e.g., easements, covenants) that were not properly excepted from coverage.
  • Unmarketability of Title: Defects that would render title unmarketable, making the property difficult to sell in the future.
  • Lack of Access: Lack of a legal right of access to and from the land.

The policy coverage is defined by Schedule A, which identifies the insured, the property interest insured (e.g., fee simple), the legal description of the land, and the policy amount. Crucially, coverage is limited by exceptions listed in Schedule B.

Key Term: Schedule A Section of a title insurance policy describing the insured estate, the property, the insured party, and the policy amount.

Key Term: Schedule B Section of a title insurance policy listing specific exceptions to coverage, such as known easements, covenants, or liens, as well as standard/general exceptions.

Worked Example 1.1

Buyer purchases Blackacre for $300,000 and obtains an owner's title insurance policy in that amount. The policy's effective date is the closing date. One year later, Neighbor asserts a valid, properly recorded easement across Blackacre that significantly diminishes its value. The easement was created 10 years prior but was missed during the title search conducted for Buyer and was not listed as an exception in Schedule B of Buyer's policy. Is this likely a covered risk?

Answer: Yes. The title insurance policy protects against defects existing on or before the policy's effective date. The undiscovered, pre-existing recorded easement constitutes a covered defect/encumbrance that was not properly excepted from coverage. The insurer would likely have a duty to defend Buyer against Neighbor's claim and indemnify Buyer for the loss in value caused by the easement, up to the policy limit.

Exclusions and Exceptions

Title insurance policies contain numerous exclusions and exceptions that limit coverage.

Standard/General Exceptions (Often found in Schedule B)

These are risks that the insurer excludes in most policies unless specifically covered by endorsement (often requiring an additional premium). They commonly include:

  • Facts discoverable by survey (e.g., encroachments, boundary discrepancies).
  • Rights of persons in possession not shown by the public records (e.g., rights of adverse possessors or tenants under unrecorded leases).
  • Easements or claims of easements not shown by the public records.
  • Mechanics' liens not shown by the public records.
  • Taxes or assessments not yet due or payable.

Specific Exceptions (Also in Schedule B)

These relate to the specific property being insured and are identified through the title search conducted before issuing the policy. Examples include:

  • Recorded mortgages.
  • Recorded easements and restrictive covenants.
  • Existing leases.

General Exclusions (Policy Conditions/Stipulations)

These exclusions apply more broadly and often relate to matters outside the scope of title risks. Common exclusions include:

  • Defects created, suffered, assumed, or agreed to by the insured.
  • Defects known to the insured but not disclosed in writing to the insurer prior to the policy date.
  • Losses resulting from governmental police power (e.g., zoning ordinances, environmental protection laws) unless a notice of enforcement or violation is recorded in the public records at the policy date.
  • Defects arising after the effective date of the policy.
  • Losses resulting from the property's physical condition.

Worked Example 1.2

Buyer obtains an owner's title policy for Whiteacre. After closing, Buyer discovers that the local zoning ordinance prohibits the commercial use Buyer intended for the property. Buyer makes a claim under the title policy for the loss in value due to the inability to use the property commercially. Is the insurer likely obligated to cover this loss?

Answer: No. Title insurance typically excludes losses resulting from governmental regulations like zoning ordinances. These are considered matters of public law, not defects in private title rights. The policy insures against defects in title, not against limitations on land use imposed by law.

Insurer's Duties

Upon receiving notice of a claim potentially covered by the policy, the title insurer generally has two primary duties:

  1. Duty to Defend: The insurer must defend the insured in litigation arising from a covered title defect or claim. This duty is broader than the duty to indemnify and arises whenever there is a potential for coverage, even if the claim is ultimately unfounded. The insurer typically retains counsel and controls the defense.
  2. Duty to Indemnify: The insurer must compensate the insured for actual monetary loss caused by a covered defect or lien, up to the policy limit. This includes paying off liens, compensating for loss in value due to an encumbrance, or covering costs associated with defending title.

If the insurer breaches these duties (e.g., wrongfully refuses to defend or pay a covered claim), it may be liable for damages, potentially including consequential damages beyond the policy limits if bad faith is shown.

Key Term: Duty to Defend The insurer's obligation under a title policy to pay the costs of defending the insured's title against covered claims or defects.

Key Term: Duty to Indemnify The insurer's obligation under a title policy to compensate the insured for actual monetary loss resulting from covered title defects or liens, up to the policy limit.

Summary

Title insurance is a contract indemnifying against losses from title defects existing at the policy's effective date. Owner's policies protect buyers, while lender's policies protect mortgagees. Coverage typically includes undisclosed defects, liens, and unmarketability, but is subject to numerous standard and specific exceptions (often listed in Schedule B) and general exclusions (like zoning). The insurer has a duty to defend against covered claims and a duty to indemnify for actual losses up to the policy limit.

Key Point Checklist

This article has covered the following key knowledge points:

  • Title insurance protects against past, undiscovered title defects, unlike other insurance protecting against future risks.
  • Owner's policies protect the buyer for the purchase price, lasting as long as ownership continues.
  • Lender's policies protect the mortgagee for the loan amount, ending upon loan repayment.
  • Covered risks generally include title defects, liens, encumbrances, and unmarketability existing at the policy date.
  • Schedule A defines the insured interest; Schedule B lists specific and standard exceptions.
  • Common exclusions include defects known to the insured, governmental regulations (zoning), and post-policy events.
  • The insurer has a duty to defend against potentially covered claims.
  • The insurer has a duty to indemnify for actual loss from covered defects, up to the policy limit.

Key Terms and Concepts

  • Title Insurance
  • Owner's Policy
  • Lender's Policy
  • Schedule A
  • Schedule B
  • Duty to Defend
  • Duty to Indemnify
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