Owner's title insurance: Encroachment from neighboring property

Just recently, during our underwriting review of an upcoming closing, our office discovered that the subject property — we will call it LOT 1 — was severely encroached upon by the improvements of the neighboring lot, which we will call LOT 2.I have included an actual copy of the location drawing below for your reference.Immediately after our discovery, my office forwarded a copy of the location drawing to the buyer and the seller advising them that we could not insure title without taking special exception to the encroachment.Because the sales contract required the seller to convey insurable title without additional risk premium or uncommon exceptions, the buyer declared the contract void and obtained a return of her earnest money deposit.Land SurveyTwo years ago, the seller had purchased the property for $450,000 with a down payment of $90,000 (his equity) and the title company had failed to advise him of this severe encroachment from the neighboring property.Fortunately, the seller elected to purchase an enhanced owner’s title insurance policy which specifically covers this type of situation – the insuring provision reads:"Someone else has a legal right to, and does, refuse to perform a contract to purchase the Land, lease it or make a Mortgage loan on it because Your neighbor’s existing structures encroach onto the Land."In laymen's terms that means if you cannot sell your house, or that you have to sell it for far less, because your neighbor's additions have seeped onto your side of the property line, then all is not lost. The enhanced owner's policy has you covered.No doubt this insured seller will be filing a claim against his owner’s title insurance policy. And the insurer will have to pay all attorney fees for correcting the problem, as well as the actual loss suffered by the insured seller, according to the terms of the policy.In this case, the seller may have to sell the property for far less than the original sales contract, and that difference would constitute his actual loss.