Titles - Title insurance

Learning Outcomes

This article examines title insurance within Real Property law and focuses on the doctrines most frequently tested on the MBE. It explains the basic purpose and structure of title insurance as a contract of indemnity, distinguishes clearly between owner’s and lender’s policies, and highlights who is actually protected under each type of policy. It analyzes the policy’s effective date, the retrospective nature of coverage, and how policy limits and duration operate for owners and lenders. It details the scope of covered risks—including defects in the chain of title, undisclosed liens and encumbrances, unmarketability of title, and lack of legal access—and contrasts these with standard exceptions, specific exceptions, endorsements, and general exclusions such as zoning and post‑policy events. It reviews the title insurer’s core duties to defend and indemnify, common measures of loss, and the insurer’s options for curing defects or paying claims. Finally, it examines how title insurance interacts with the buyer’s right to marketable title, deed covenants, and subsequent transfers of property or mortgage loans, enabling precise issue-spotting and rule application on exam questions.

MBE Syllabus

For the MBE, you are required to understand title insurance as a mechanism for protecting purchasers and lenders against title defects, with a focus on the following syllabus points:

• 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.
• Relate title insurance to concepts of marketable title and covenants of title in deeds.

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 therefore seek additional protection against title defects through title insurance.

Title insurance is a contract of indemnity in which the insurer, in exchange for a one‑time premium, agrees to indemnify the insured against monetary loss caused by certain defects in title to real property that existed on the policy's effective date. The policy also typically includes a promise to defend the insured’s title in litigation based on a covered claim.

Unlike most other forms of insurance (which protect against future events such as accidents or fires), title insurance is retrospective: it protects against past, undiscovered defects in the title as of the effective date of the policy.

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

Most modern real estate transactions include several overlapping protections regarding title:

• The implied covenant of marketable title in the land sale contract.
• Any covenants of title in the deed (e.g., in a general warranty deed).
• One or more title insurance policies issued in favor of the buyer and/or the lender.

These protections operate at different times and in different ways, and MBE questions often test how they interact.

Key Term: Marketable Title
Title that a reasonably prudent buyer would be willing to accept—reasonably free from doubt and from an unreasonable risk of litigation (e.g., free of undisclosed liens, significant encumbrances, or serious defects in the chain of title).

Key Term: Record Title
The state of title as it appears in the public land records, based on properly recorded instruments in the chain of title.

Title insurance is primarily concerned with record title. The insurer examines the public records, issues a policy describing what it is insuring, and then agrees to bear certain risks if that examination turns out to have missed a defect that existed on the policy date.

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 and is tied to the insured owner’s interest.
2. Lender's (or Mortgagee's) Policy: Protects the mortgage lender. Coverage is limited to the amount of the loan and focuses on the validity, priority, and enforceability of the lender’s mortgage.

A buyer will typically purchase an owner's policy for themselves and will usually be required by the lender to purchase a lender's policy for the lender. These policies are issued simultaneously at closing, often at a discounted combined premium.

Key Term: Owner's Policy
A title insurance policy protecting the property owner against covered title defects, typically in an amount equal to the purchase price.

Key Term: Lender's Policy
A title insurance policy protecting the mortgage lender against loss caused by covered defects affecting the lender’s mortgage interest, typically in an amount equal to the outstanding loan.

Owner’s Policy: Duration and Beneficiaries

An owner's policy generally:

• Becomes effective on the policy date (usually the closing date).
• Provides coverage for as long as the insured (or specified successors, such as heirs) retain an interest in the property.
• Has a policy limit equal to the stated amount (commonly the purchase price) and does not automatically increase with appreciation.

Key Term: Policy Limit
The maximum amount the title insurer is obligated to pay under the policy, typically the stated policy amount (e.g., the purchase price or loan amount).

A critical exam point: an owner’s policy does not run with the land. It protects only the named insured (and limited defined successors). If the insured later sells the property, the buyer is not covered by the seller’s owner’s policy and must obtain a new policy for protection.

Lender’s Policy: Duration and Transfer

A lender’s policy:

• Protects the lender’s security interest, not the owner’s equity.
• Usually remains in force until the loan is repaid, refinanced, or otherwise satisfied, or the lender’s mortgage is extinguished (e.g., by foreclosure).
• Generally follows the note: if the lender assigns the mortgage loan to another lender, the assignee becomes the insured under the lender’s policy.

Thus, unlike an owner’s policy, a lender’s policy effectively “runs with” the mortgage loan. This distinction is explicitly tested.

Key Term: Effective Date
The date on which title insurance coverage begins (usually the closing date). The policy insures against covered defects existing on or before this date, not against defects arising later.

Scope of Coverage

Title insurance generally covers risks that affect the quality or marketability of title as of the policy date. The insured risk is not that litigation will occur, but that the insured will suffer monetary loss because the title is worse than represented in the policy.

Key Term: Unmarketability of Title
A condition in which title is so defective or uncertain that a reasonable buyer would refuse to purchase, creating an unreasonable risk of litigation over ownership or encumbrances.

Typical covered risks include:

• Defects in Title:

  • Errors in the public records (misindexing, clerical mistakes).
  • Hidden defects such as forgery, fraud, undue influence, lack of capacity of a grantor, or defective delivery of deeds in the chain of title.
  • Missing or improperly executed links in the chain of title that affect the insured’s claimed estate.

• Liens and Encumbrances:

  • Undisclosed mortgages, judgment liens, tax liens, or other monetary encumbrances that existed on the policy date and were not properly excepted from coverage.
  • Undisclosed easements or restrictive covenants, if they existed on the policy date and are not listed as exceptions.

• Unmarketability of Title:

  • Situations where, because of a covered defect, the insured’s title is not reasonably free from doubt and a hypothetical reasonable buyer would refuse to purchase.

• Lack of Access:

  • Lack of a legal right of access to and from a public road, even if the land is physically reachable only over another’s land.

Key Term: Schedule A
The section of a title insurance policy describing the insured, the insured estate (e.g., fee simple), the legal description of the land, and the policy amount.

Key Term: Schedule B
The section of a title insurance policy listing specific exceptions to coverage, including standard/general exceptions and property-specific exceptions.

The core of the policy’s promise is defined by Schedule A and limited by what is excluded or excepted in Schedule B and the general conditions.

Key Term: Exception
A specific item (such as a particular mortgage, easement, or covenant) identified in the policy—usually in Schedule B—that is excluded from coverage.

Key Term: Exclusion
A policy provision, often in the general conditions, that removes entire categories of risk from coverage (e.g., zoning, post-policy events), regardless of whether they are listed in Schedule B.

Key Term: Endorsement
An amendment to a title insurance policy that adds, modifies, or deletes coverage (often used to remove standard exceptions or insure additional risks for an extra premium).

Effective Date and Duration of Coverage

Title insurance is retroactive in scope:

• It covers only defects that exist on or before the effective date.
• It does not cover defects created after the policy date (e.g., a lien filed years later for the insured’s unpaid contractor).

Coverage duration depends on the type of policy:

• For an owner’s policy, coverage generally lasts as long as the insured owns the property (and, in many forms, while the insured remains liable under warranties of title in a later conveyance).
• For a lender’s policy, coverage lasts as long as the insured mortgage remains outstanding.

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.

Worked Example 1.2

Buyer obtains an owner's title policy for Greenacre on June 1. On August 1 of the same year, Buyer hires Contractor to improve the property but refuses to pay. Contractor records a mechanic’s lien on October 1 and attempts to enforce it. Buyer tenders the claim to the title insurer. Is the mechanic’s lien likely covered?

Answer:
No. The mechanic’s lien arose after the policy’s effective date and was created by Buyer's own post-policy conduct (failing to pay Contractor). Title insurance generally covers only defects existing on the policy date and typically excludes post-policy liens, especially those created or suffered by the insured. The insurer would likely deny coverage.

Exclusions and Exceptions

Title insurance policies contain numerous exclusions and exceptions that significantly limit coverage. Understanding these is important for exam analysis.

Key Term: Standard Exceptions
Boilerplate exceptions, usually listed in Schedule B, that exclude broad categories of off-record or not-readily-detectable risks (e.g., matters discoverable by survey or inspection).

Key Term: Specific Exceptions
Property-specific matters identified through the title search (e.g., particular easements, covenants, or mortgages) that are expressly excluded from coverage in Schedule B.

Key Term: General Exclusions
Policy-wide exclusions (in the conditions section) that remove entire classes of risk—such as governmental regulation, post-policy events, or defects known to the insured—from coverage.

Standard/General Exceptions (Often in Schedule B)

These are risks the insurer excludes in most standard policies unless the insured purchases an endorsement to cover them. They commonly include:

• Facts discoverable by an accurate survey of the land (e.g., encroachments, boundary discrepancies).
• Rights of persons in actual possession not shown by the public records (e.g., an adverse possessor, or a tenant under an unrecorded lease).
• Easements or claims of easements not shown by the public records (off‑record easements).
• Mechanics' or materialmen's liens not shown by the public records.
• Taxes or assessments not yet due or payable.

These standard exceptions reflect the insurer’s focus on record title. The insurer searches the records; risks that would be discovered by a survey, physical inspection, or inquiry of persons in possession are typically left to the buyer to investigate, unless endorsed.

Specific Exceptions (Also in Schedule B)

These relate to the particular property and are identified through the pre-policy title search. Examples include:

• A specific recorded mortgage securing a known loan.
• A particular recorded easement in favor of a neighbor or utility.
• Recorded restrictive covenants affecting the subdivision.
• Recorded leases or options.

If something appears as a specific exception, the policy does not cover loss arising from that item. For example, if a utility easement is listed as an exception, the owner cannot claim under the policy merely because the easement reduces the property’s value.

General Exclusions (Policy Conditions/Stipulations)

General exclusions apply to broad categories of risks typically considered outside the proper scope of title insurance. Common exclusions include:

• Defects created, suffered, assumed, or agreed to by the insured
  (e.g., the insured voluntarily grants an easement or mortgage after the policy date, or colludes in a fraudulent conveyance).

• Defects known to the insured but not disclosed in writing to the insurer before the policy date.
  The insurer refuses to insure against risks that the insured secretly knows about but fails to reveal.

• Losses resulting from governmental police power, including:

  • Zoning ordinances.
  • Building codes.
  • Environmental and other regulatory laws.
    Unless a notice of violation or enforcement action was already of record on the policy date, these public-law restrictions are excluded.

• Defects arising after the effective date of the policy.
  Post-policy liens, encumbrances, or conveyances (other than the insured’s own conveyance) are generally outside coverage.

• Losses resulting from the property's physical condition.
  Structural problems, termites, flooding, and similar physical issues are not title risks and are excluded.

Worked Example 1.3

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 such as zoning ordinances. Zoning is a matter of public law, not a defect in private title rights. The policy insures against defects in title, not against limitations on land use imposed by law. Buyer may have a contract problem (if Seller misrepresented permitted uses), but there is no title insurance claim.

Worked Example 1.4

Owner buys Blueacre and obtains a standard owner's policy. Before closing, Owner learns (from a neighbor) that a footpath has been used across part of the land for decades. Owner says nothing to the title insurer. The insurer’s title search finds no recorded easement, so no exception is listed. A year later, Neighbor sues, claiming a prescriptive easement, and wins. Owner files a claim under the policy. The insurer discovers Owner knew of the potential easement before closing and failed to disclose it. Is coverage likely?

Answer:
Probably not. While prescriptive easements can be covered defects, most policies exclude defects known to the insured but not disclosed in writing to the insurer before the policy date. Because Owner had prior knowledge of the path and failed to disclose it, the insurer can invoke this exclusion and deny coverage.

Insurer's Duties

Upon receiving notice of a claim potentially covered by the policy, the title insurer typically has two primary duties: the duty to defend and the duty to indemnify. The insured, in turn, has duties to give prompt notice, cooperate in the defense, and not impair the insurer’s rights.

Key Term: Duty to Defend
The insurer's obligation to provide and pay for a legal defense of the insured’s title against claims or litigation that fall within, or potentially within, policy coverage.

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

Duty to Defend

The duty to defend is often described as broader than the duty to indemnify:

• It arises whenever the allegations in a claim or lawsuit, if true, would fall within (or potentially within) policy coverage.
• The insurer typically selects and pays counsel, and controls the defense and settlement negotiations, subject to the insured’s cooperation.

If the insurer improperly refuses to defend when it should, it may be liable for the insured’s defense costs and, in some jurisdictions, additional damages for bad faith.

Duty to Indemnify and Measure of Loss

The duty to indemnify requires the insurer to pay for:

• The cost of removing or curing a covered defect (e.g., paying off a lien, obtaining a release, or quieting title); or
• The decrease in the value of the insured’s interest caused by the defect, measured at the time the defect is established, subject to the policy limit.

Common measures include:

• For a partial defect (e.g., a previously unknown easement): the difference between the property’s value without the defect and with the defect.
• For a total failure of title (e.g., a forged deed in the insured’s chain), the loss is typically capped at the policy amount, often approximating the purchase price.

The insurer may also reimburse reasonable costs incurred in defending title if those fall under the duty to defend.

Insurer’s Options

Instead of simply writing a check, the insurer usually retains options, such as:

• Curing the defect (e.g., negotiating a release of a lien or easement).
• Paying the insured’s actual loss up to the policy limit.
• Purchasing the adverse interest (e.g., buying out the easement holder) and thereby eliminating the defect.
• Paying the policy limit and terminating further obligations under the policy.

Key Term: Subrogation
The insurer’s right, after paying a loss, to step into the insured’s shoes and pursue the responsible third party (e.g., the party who caused the defect) to recover what the insurer has paid.

If the insurer indemnifies the insured, it is usually subrogated to the insured’s claims against anyone responsible for the defect (for example, the grantor who breached a covenant of warranty).

Worked Example 1.5

Buyer purchases Redacre for $400,000 with an owner’s policy in that amount. Later, a court rules that an undisclosed, pre-existing easement allows a neighbor to use half of Redacre as a driveway, reducing its value by $100,000. The insurer chooses to pay Buyer $100,000 instead of trying to extinguish the easement. Buyer argues that the insurer must pay the full $400,000 policy limit because the property is less desirable. Is Buyer correct?

Answer:
No. Title insurance is a contract of indemnity, not a guaranty of value. The insurer’s obligation is to reimburse actual monetary loss caused by the covered defect, capped by the policy limit. Here the covered loss is $100,000—the proven diminution in value attributable to the easement. The insurer may satisfy its duty to indemnify by paying that amount; it is not required to pay the full policy limit absent a total failure of title or loss exceeding $100,000.

Consequences of Breach by the Insurer

If the insurer wrongfully refuses to defend or to pay a valid covered claim, it may be liable:

• For the insured’s reasonable attorneys’ fees and defense costs.
• For the amount of any judgment or settlement that would have been covered.
• In some jurisdictions, for additional damages (possibly exceeding the policy limit) if the refusal involves bad faith.

These consequences are rooted in general insurance law rather than a unique rule of real property, but they can appear in MBE questions involving the insurer’s duties.

Title Insurance and Marketable Title

The implied covenant of marketable title in a land sale contract and a title insurance policy address similar concerns but at different stages and under different doctrines.

From the contract standpoint:

• Every land sale contract contains an implied promise that at closing, the seller will deliver marketable title.
• Marketable title is judged from the standpoint of a reasonable buyer and is free from an unreasonable risk of litigation.
• Defects that render title unmarketable include:
  • Significant defects in the chain of title.
  • Undisclosed mortgages, liens, or restrictive covenants.
  • Undisclosed, burdensome easements.
  • Title resting solely on adverse possession without a quiet title judgment.
  • Existing violations of zoning ordinances or significant encroachments.

Even if a title insurer is willing to issue a policy, that does not automatically make the title marketable for purposes of the contract. The buyer is not required to accept defective title and merely rely on the insurer to pay if a problem arises later.

After closing:

• The contract merges into the deed (the merger doctrine), and the buyer generally must rely on deed covenants and title insurance rather than the contract.
• If a defect is discovered post‑closing, the buyer may have claims under:
  • The title policy (if the defect is covered); and/or
  • The deed’s covenants of title (e.g., covenants of seisin, right to convey, against encumbrances in a general warranty deed).

MBE questions may test whether a buyer can refuse to close due to an unmarketable title, and whether title insurance changes that result (it usually does not).

Worked Example 1.6

Seller contracts to sell Blackacre to Buyer for $500,000. The contract requires Seller to deliver marketable title at closing. A title search reveals a recorded easement in favor of Neighbor that substantially reduces Blackacre’s value. Seller obtains an owner’s title insurance policy in Buyer’s name that does not except the easement (the insurer failed to find it). On the day of closing, Buyer discovers the easement and refuses to close. Seller argues that Buyer must proceed because any loss will be covered by title insurance. Must Buyer close?

Answer:
No. The contract entitles Buyer to marketable title at closing. A significant, undisclosed easement renders title unmarketable. The availability of title insurance does not cure the unmarketability or force Buyer to accept defective title and rely on the insurer. Buyer may refuse to close and may seek contract remedies (e.g., rescission or specific performance with abatement) regardless of the existence of the title policy.

Title Insurance and Subsequent Purchasers or Lenders

A key exam trap involves who is actually protected by a given policy.

• An owner’s policy protects only the named insured owner (and limited defined successors, such as heirs) for as long as they retain an interest. It does not automatically protect any future buyer of the property.
• A lender’s policy is tied to the secured loan; it generally benefits whoever holds the loan, so it follows the mortgage upon assignment.

Thus:

• If Owner sells to Buyer, Buyer cannot claim under Owner’s old owner’s policy; Buyer must purchase a new policy.
• If Lender assigns the mortgage note to Bank, Bank receives the benefit of the lender’s policy.

Worked Example 1.7

Owner buys Whiteacre with an owner’s title policy. Five years later, Owner sells Whiteacre to Buyer by general warranty deed but Buyer declines to purchase a new owner’s policy. A year after that, a pre-existing, undiscovered recorded easement surfaces, reducing the value of Whiteacre by $50,000. Buyer sues Owner for breach of the covenant against encumbrances and also tries to make a claim on Owner’s title policy. Does Buyer have rights under the title policy?

Answer:
No. An owner’s title policy protects only the named insured (Owner) and certain defined successors; it does not run with the land. Buyer may pursue Owner under the deed’s covenants—for example, for breach of the covenant against encumbrances—but Buyer cannot directly claim under Owner’s policy. Owner, however, may be able to invoke their title insurance for indemnity if Owner is held liable to Buyer due to a covered defect.

Summary

Title insurance is a specialized contract of indemnity that protects against past, undiscovered title defects existing as of the policy’s effective date. It does not insure against future events, physical defects, or most governmental regulations.

• Owner's policies protect buyers (or other owners) for the policy amount, usually the purchase price, for as long as they retain an insured interest. These policies do not run with the land; each new owner generally needs a new policy.
• Lender's policies protect mortgagees for the loan amount and typically follow any assignment of the mortgage loan.

Coverage is defined by Schedule A and limited by Schedule B and the policy’s general exclusions. Covered risks generally include:

• Defects in the chain of title, including fraud, forgery, and lack of capacity.
• Undisclosed liens and encumbrances existing as of the policy date.
• Unmarketability of title caused by covered defects.
• Lack of legal access to the property.

Common limitations on coverage include:

• Standard exceptions for survey matters, off-record rights of persons in possession, and unrecorded easements and liens.
• Specific exceptions listing particular encumbrances discovered in the title search.
• General exclusions for defects created or known by the insured, governmental regulations like zoning (absent recorded violations), post-policy events, and physical conditions of the property.

The insurer’s central obligations are:

• The duty to defend the insured against covered claims affecting title.
• The duty to indemnify for actual monetary loss caused by covered defects, up to the policy limit, typically measured as either the cost to cure or the diminution in value.

Finally, title insurance interacts with, but does not replace, the buyer’s contractual right to marketable title at closing and any covenants of title in the deed. For exam purposes, keep these doctrines distinct and analyze who is insured, what risks are covered, and whether any exclusions or exceptions apply.

Key Point Checklist

This article has covered the following key knowledge points:

• Title insurance is a retrospective contract of indemnity, protecting against title defects existing on the policy's effective date.
• An owner's policy protects the buyer/owner for the policy amount (usually the purchase price) and remains in effect while the insured retains an interest; it does not run with the land.
• A lender's policy protects the mortgage lender for the amount of the loan and generally follows any assignment of the mortgage.
• Schedule A defines the insured party, the insured estate, the land, the effective date, and the policy amount.
• Schedule B lists both standard exceptions and specific exceptions that limit coverage.
• Covered risks include defects in the chain of title, undisclosed liens and encumbrances, unmarketability of title from covered defects, and lack of legal access.
• Standard exceptions exclude survey and inspection matters, unrecorded easements, rights of persons in possession, and certain unrecorded liens, unless removed by endorsement.
• General exclusions bar coverage for defects created or known by the insured, governmental regulations such as zoning (absent recorded violations), post-policy events, and physical conditions.
• The insurer has a duty to defend against potentially covered claims and a duty to indemnify for actual monetary loss up to the policy limit.
• The measure of loss is typically the cost to cure the defect or the diminution in value caused by the defect, subject to the policy limit.
• Title insurance does not cure an unmarketable title at the contract stage; a buyer can still refuse to close if the seller cannot provide marketable title.
• Owner’s policies protect only the named insured; lender’s policies follow the mortgage; subsequent purchasers generally need their own policies.
• Title insurance interacts with, but does not replace, deed covenants and the implied covenant of marketable title.

Key Terms and Concepts

• Title Insurance
• Owner's Policy
• Lender's Policy
• Schedule A
• Schedule B
• Marketable Title
• Record Title
• Unmarketability of Title
• Effective Date
• Policy Limit
• Exception
• Exclusion
• Endorsement
• Standard Exceptions
• Specific Exceptions
• General Exclusions
• Duty to Defend
• Duty to Indemnify
• Subrogation