Title Insurance for the Future Today. Jack Marinello. Pop singer Paul Simon once had a hit titled 50 Ways to Leave Your Lover. The

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1 What you don t know can hurt you. Title Insurance for the Future Today Jack Marinello Pop singer Paul Simon once had a hit titled 50 Ways to Leave Your Lover. The refrain included the words, Just slip out the back, Jack/ Make a new plan, Stan/No need to be coy, Roy/ Just listen to me! If Paul Simon could be talked into writing a real estate sequel to his 1975 hit, it might be titled, 50 Ways to Lose Your Property with the following lyrics: Watch out for federal liens, Gene/ Suspect fraudulent deeds, Reed/ Avoid faulty capacity, Cassidy/And keep yourself free. An investment in real estate is often the largest purchase individuals make in their lifetimes. A home purchase represents more than just a roof over the owner s head. Over time, it can contribute substantially to a person s equity and represent the largest asset he or she reports on personal balance sheets. Because so much is at stake in a claim to the bundle of rights that is called real estate ownership, it is important to protect this valuable asset against possible title problems that can hinder transfer of real property or make it unmarketable. Today, sellers of real property often transfer ownership through a written instrument known as warranty deed. This method of conveyance suggests that the grantor (seller) is warranting that the grantee (buyer) is receiving good and marketable title to the property subject only to certain liens and encumbrances of record that are known to and acceptable to the buyer. (The type of deed used in real estate transactions and the promises contained in the conveyance are subject to local custom.)

2 Unfortunately, not everything can be guaranteed to be what it appears. Therefore, title insurance was created to provide protection to both seller and buyer in a real estate transaction. The seller who offers an Owner s Policy of Title Insurance transfers the risk of his warranty to the title insurance company who offers to insure the buyer as beneficiary. (Generally, on the West Coast, the seller provides title insurance for the purchaser and fulfills his obligations under a special warranty deed by doing so. Generally, on the East Coast, where the general warranty deed is typically used to convey property, the buyer usually purchases title insurance. There are notable exceptions, however for example, Florida and Illinois are seller-paid states.) A standard policy of title insurance protects the property owner against defects that occurred before the date of the policy but remain undisclosed until sometime later. Unfortunately, even the most thorough search of public records cannot reveal some of these hidden defects and hazards, such as forged deeds, mortgages and other instruments. Title insurance companies may discover voidable deeds by minors and by persons of unsound mind, defective acknowledgement due to lack of authority of the notary, or discovery of a later will after probate of a first will. In reality, there are more than 50 ways to lose your property! In an effort to protect both sellers and buyers against the losses that might arise from undisclosed or undiscovered defects in the chain of title to a property, title insurance companies have provided policies of insurance for both buyers and lenders. Although these policies have proven to be of great value to the beneficiaries when a loss occurs, there are numerous hazards that have not been covered in the past, even with the

3 availability of special endorsements to the standard policy and the extended policy of title insurance. The good news is that a relatively new form of title insurance has been introduced into the marketplace providing greater coverage against defects to title in the past, the present and even out into the future. The bad news is, few real estate licensees have been exposed to the new products. The best evidence of this new policy, from my perspective, is the policy with which I am most familiar, so I ll use the Eagle policy as an example. First introduced by First American Title Insurance Company, a major national underwriter of title and escrow services, the Eagle policy provides more coverage automatically than any previous policy offered. Some of the newer coverage is completely new and had never before been offered by a title insurer, providing even post-policy protection. Such postpolicy risk coverage has been offered in the past only by an endorsement which had to be specifically requested. The Eagle Protection Owner s Policy-- and others similar to it-- were created to benefit both homeowners and real estate professionals. Owners recognized the need for greater coverage, including some issues that had never been offered by any other title insurer. For real estate professionals, there was a need to reduce the liability and exposure they had when title problems occurred after closing. Prior to the issuance of new types of coverage, the title industry relied primarily upon the American Land Title Association (ALTA)* standard Owner s Policy (10/17/92) and the ALTA Residential Plain Language Policy (6/1/87). The Owner s Policy offered

4 four areas of protection: loss of damage due to title problems; defects due to liens or encumbrances; unmarketability of title; and lack of legal right of access. The Plain Language Policy increased the number of covered risks to 14 (primarily related to coverage involving violations of zoning, land use, and protective covenants). In 1998, ALTA approved a new title insurance policy for homeowners that currently provides 29 different areas of covered risk. Available through First American Title Insurance Company, the Eagle policy is the brand-name version of ALTA s newest type of homeowner title insurance policy. (To see a sample of the ALTA Homeowner s Policy of Title Insurance for a One-to-Four Family Residence 10/17/98 policy, go to Below is a brief description of some of the problems covered by this new policy: Post-policy forgery or impersonation leaving the property owner with no record title or with mortgages on the property owner s home that the owner never made. Someone claiming that during the property owner s ownership, a prescriptive negative easement (such as a view easement) has been created over the land, limiting the property owner s use. Neighbors building encroaching structures onto the property owner s land after the owner purchased it. Anyone, after the property owner, purchasing the home and recording a deed, mortgage, or other document that, by mistake, describes the property instead of the land intended, leaving the property owner with a clouded title, expenses and a hassle to get it corrected. Lack of actual physical access for both vehicles and pedestrians to and from the property owner s home. (Other policies only provide coverage for lack of a legal right of access.)

5 Pre-existing violations of protective covenants which someone is trying to force the property owner to correct or remove. This coverage applies even if the covenants are excepted from coverage in schedule B. Subdivision law violations of previous owner. (In some areas the title is void if the subdivision laws have been violated. In others the property owner cannot obtain building permits to make the desired improvements.) Building permit violations of previous owners. (This is very valuable to the unwary purchaser because it is virtually impossible to know whether all portions of the home were constructed with a building permit.) Zoning law or regulation violations of previous owners which the insured is forced to remedy or remove. Encroachments of existing structures onto neighboring property or onto easements affecting the property owner s home. (There is even coverage for boundary wall or fence encroachments.) The residence with the address shown in the policy not being located on the land described. Additionally, the Homeowner s Policy gives coverage for renting a substitute residence if the insured can t use his/her home due to a covered claim. This policy also automatically increases in Policy Amount by 10% per year for the first five years. The coverage is increased to a maximum of 150% of the original policy amount (usually the purchase price). This provides the consumer with automatic inflation protection as well as increased value due to improvements. One of the great benefits of this policy is that it solves a problem inherent in other forms. Other policies terminate when the property owner transfers ownership. This has been problematic for owners and estate planning professionals who create trusts. Property owners may have lost the property owner s title insurance coverage when they put the property in trust. Not so with the Eagle policy.

6 A few of these coverages are subject to deductibles and caps on the indemnity benefit that may be less than the stated insurance amount. ( New Homeowner s and Expanded Coverage Policies, by Clifford L. Morgan, January /February, 2002, Volume 81, Number 1, ww.alta.org/store/ttlenews/02/01_05.htm). A HIGHER STANDARD OF COVERAGE IN ACTION Here are some examples of how these policies work: Case Study #1 Sam and Wendy Desarno loved the great house and spacious property they bought in Northern California. Investigation revealed that the properties owned by the DeSarnos and their neighbors had at one time been a single property, divided by a previous owner. Upon division, the home now occupied by the DeSarnos was on one segment and its leach field on their neighbor s. The county had no building permit on file for the leach field. So, drainage from the DeSarno s home began so show up on their neighbor s land. The neighbor wanted the DeSarnos to remedy the problem. The DeSarnos filed a lawsuit against their home s previous owner and the real estate broker for failure to disclose the problem. Luckily, the DeSarnos were Eagle policyholders. Their insurer considered the leach field to be a structure. The problem was solved at no expense to the DeSarnos or their neighbor. The lawsuit was dropped. Real estate agent Tim Conway could have been held responsible, even though he could not have been aware of the problem. Conway noted: This was a large, older property not the kind of transaction we deal with a lot. So, we took our escrow officer's advice

7 and recommended that the DeSarnos obtain an extended coverage policy. Later, when we were being sued, a representative called from First American to tell us that the company was taking care of everything. When we recommended the policy, we thought it was a smart move. As it turned out, it was very smart. Case Study #2 Just after buying his home, Tim Cromwell brought in a small construction team to renovate the interior of the house. He expected to make a few minor adjustments. He didn t expect the news the team gave him. Minutes after the team arrived, they found that the carpet in the den had been laid directly onto plywood, which lay directly on dirt there were no concrete, no footings, and no foundation. They soon found two other areas in the house with similar problems. So Tim contacted the city, which, after inspection, determined that additions had been made to the house without a building permit. The city then ordered him to tear out those portions of the house or rebuild them completely to code, and with a permit. Recalling his decision to purchase a newer type title policy when he bought the home, Tim went to his title company representative. It was quickly determined that the policy s building permit violation coverage applied. Tim was paid the $25,000 the policy provided for repairs. Comparing Premiums Real estate professionals might assume that the cost of this type of policy versus that of a standard policy is appreciably higher. Not true. For example:

8 Insurance Amount Standard Policy Improved Policy Difference 100,000 $622 $685 $63 250,000 $1,020 $1,122 $ ,000 $1,257 $1,383 $126 For a precise quote, consumers will have to contact their title insurance agent, but generally the cost is only about 10% higher than premiums on standard policies. The policy may not be available in all states. For more information, contact your local title insurance representative. Consumers should also check with other title companies who may also carry their name-brand versions of the ALTA policy described here. Paul Simon once wrote: Like a bridge over troubled water/ I will ease your mind. So does a good title insurance policy! *The American Land Title Association, founded in 1907, is the national trade association of the title insurance industry. ALTA members search, review and insure land titles to protect home buyers and mortgage lenders who invest in real estate. ALTA is headquartered in Washington, D.C. Members of the association are in business in most counties across the nation. Nearly all title insurance companies hold ALTA membership, in addition to abstracters and title agents. Nearly 2,000 title agents, abstracters, and title insurance companies are active members, ranging from small, one-county operations, to large national title insurers. Its website is Special thanks go to Lorri Ragan, director of communication, and James R. Maher, executive vice-president of ALTA, for their review of this article. BIO

9 Jack Marinello, DREI, represents First American Title Agency as director of training for Utah and teaches real estate continuing education classes throughout the state. He currently serves as a director of REEA Utah and as vice-chairman of the Salt Lake Board of Realtors Education Committee. Jack s real estate career spans 24 years of experience in home sales, income property trades, property management, mortgage brokerage and title insurance. He can be reached at jmarinello@firstam.com.