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August 25, 2014

Abstract of Title VS Title Insurance

An abstract of title summarizes the various instruments and documents affecting the title to real property, whereas title insurance is a comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon.

Abstract of Title — A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The person preparing the abstract of title, called an abstracter, searches the title as recorded or registered with the county recorder, county registrar, circuit court and/or other official sources. The abstracter then summarizes the various instruments affecting the property and arranges them in the chronological order of recording, starting with the original grant of title.

The abstract includes a list of public records searched and not searched in preparation of the report. In summarizing, a deed in the chain of title, the abstracter might note the recorder’s book and page number, the date of the deed, the recording date, the names of the grantor and grantee, a brief description of the property, the type of deed and any conditions or restrictions contained in the deed.

The abstract of title does not guarantee or ensure the validity of the title of the property. Rather, it is a condensed history that merely discloses those items about the property that are of public record; thus, it does not reveal such things as encroachments and forgeries. Therefore, the abstracter is usually liable only for damages caused by his or her negligence in searching the public records.

Title Insurance — A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising from defects in title to real estate or any liens or encumbrances thereon. Unlike other types of insurance, which protect a policyholder against loss from some future occurrence (such as a fire or auto accident), title insurance in effect protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.

Needless to say, a title company will not ensure a bad title any more than a fire insurance company would insure a burning building. However, if upon investigation of the public records and all other material facts, the title company feels that it has an insurable title, it will issue a policy. A title insurance policy will protect the insured against losses arising from such title defects (“hidden risks”) as the following:
 
  • Forged documents such as deeds, releases of dower, mortgages
  • Undisclosed heirs; lack of capacity (minors)
  • Mistaken legal interpretation of wills
  • Misfiled documents, unauthorized acknowledgments
  • Confusion arising from similarity of names
  • Incorrectly given marital status; mental incompetence
In addition, and most important, the title company will agree to defend the policyholder’s title in court against any lawsuits that may arise from defects covered in the policy. A title insurance policy consists of three sections:
 
  • The agreement to ensure the title and indemnify against loss
  • A description of the estate and property being insured
  • A list of conditions of and exclusions to coverage
These uninsured exclusions include such title defects as:
 
  • Rights of parties in possession, not shown in the public records, including unrecorded easements
  • Any facts that an accurate survey would reveal (e.g., encroachments)
  • Taxes and assessments not yet due or payable
  • Zoning and governmental restrictions
  • Unpatented mining claims
  • Certain water rights
Title indemnity is made as of a specific date. Except with certain policies, a one-time premium is paid, and coverage continues until the property is conveyed to a new owner (including conveyance to an insured’s wholly owned corporation). It does not run with the land. Coverage is thus limited to the tenure of the named insured, and certain of the insured’s successors by operation of law.

Most policies provide, however, that the coverage does not terminate “so long as an insured retains an estate or interest in the land, or owns an indebtedness secured by a purchase-money mortgage given by a purchaser from such insured, or so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer or conveyance of such estate or interest.”

There are two major types of title insurance, the owner’s policy, and the mortgagee’s or lender’s policy. An owner’s policy is issued for the benefit of the owner, the owner’s heirs and devisees or, in the case of a corporation, its successors by dissolution, merger or consolidation; but the policy is not assignable. For an added premium, title companies will issue an extended coverage owner’s policy for certain properties to cover possible title defects excluded from standard coverage. Such title defects may include the rights of parties in possession, questions of a survey and unrecorded liens.

A lender’s policy is issued for the benefit of a mortgage lender and any future holder of the loan. It protects the lender against the same defects as an owner under an owner’s policy (plus additional defects), but the insurer’s liability is limited to the mortgage loan balance as of the date of the claim. In other words, liability under a lender’s policy reduces with each mortgage payment and is voided when the loan is completely paid off and released. Because of this reduced liability, a lender’s policy usually costs less than an owner’s policy. Under a mortgagee policy, the loss payable is automatically transferred to the holder of the mortgage. Upon foreclosure and purchase by the mortgagee, the policy automatically becomes an owner’s policy, insuring the mortgagee against loss or damage arising out of matters existing before the effective date of the policy. In addition to these policies, title companies also issue policies to cover the leasehold interests of a lessee, a lender under a leasehold mortgage or a vendee under a contract for deed.

In the event of a loss under a mortgagee’s policy, the insurer pays the mortgagee the balance due on loan, and the owner is thereby relieved from making further payments. However, the owner still stands to lose the property and the investment. For this reason, it is sound practice to obtain an owner’s policy where the lender is already requiring a mortgagee’s policy; there is usually only a slight additional premium to issue both policies simultaneously. Some areas, by custom, require that both policies be purchased. Local practice and custom usually dictate which party to a transaction buys what type of policy. As an example, a seller may pay for the owner’s policy, guaranteeing the title, whereas the buyer may pay for a lender’s policy, protecting the mortgagee’s interest in the real estate. Title insurance may be required by custom, even where the title is registered in the Torrens system, to protect against items not shown on the transfer certificate of title (unrecorded liens, such as federal tax liens). The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation also recognize the importance of title insurance, and they require it on every loan they buy.

Title insurance premiums vary throughout the country, but their costs reflect the two basic title insurance considerations— the cost of title examination and cost of risk insurance. The average cost is approximately 0.5 percent of the cost of the property. It takes a week for the policy to be issued, much less than the time it would take to prepare an abstract of title. If the same title company has recently issued a policy on the same property, then it may give a discount called a reissue rate.

Note that, if an insured property appreciates in value (as when an expensive improvement is made), it is good practice to increase the amount of title insurance to cover possible increased losses. Newer policies have an “inflation guard” endorsement to cover appreciation.

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