Owner’s title insurance: The costly 'bond off'

Part 4 of a series

So let’s say you just sold your home. You then receive an email notice from the settlement company as follows:

"Our office has completed the title search for your upcoming closing and sale of 2525 Badtitle Lane, and we regret to inform you that the search has revealed two unexpected mortgage liens secured against the subject property. Both of these open mortgages (deeds of trust) were acquired by your seller (the prior owner).

The settlement company that handled your closing in 1995 when you purchased the property would have been responsible for paying off and filing lien releases for these two mortgages. Our office has attempted to contact that settlement company but, unfortunately, that settlement company is no longer in business.

Please produce a copy of your owner’s title insurance policy so that we may contact the title insurance underwriter to verify payoff and satisfaction of these mortgages and request that the underwriter pay the costs for curing this problem."

You begin searching your paperwork from the 1995 closing only to find that you elected to waive owner’s title insurance coverage. In other words, you don’t have an owner’s title insurance policy.

Now what?

You contact the settlement company in response to the notice and explain that you don’t have owner’s title insurance coverage. The settlement company then explains that both open mortgages must be "bonded off." That is, you have to apply for a bond with a bonding company in order to convey title to your buyer.

The bonding company charges $20.00 per thousand of the face amount of each mortgage. In this case, the first mortgage is for $115,000.00 ($2,300.00 bond cost) and the second mortgage is for $75,000.00 ($1,500.00 bond cost) for a total bond cost of $3,800.

Had you elected to purchase owner’s title insurance coverage in 1995 when you purchased the property, you would have paid $980.00 for the owner’s title insurance coverage and the title insurance underwriter would have been responsible for the bonding expense.

Instead, you now have to write a check for $3,800.00 in order to deliver insurable and marketable title to your buyer.

Owner's title insurance: Encroachment from neighboring property

Part 3 of a series

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.

Two 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.

Owner's title insurance: Case of clerical error

Part 2 of a series

Our most recent real-life case involved a $65,000 claim and a tax sale purchase, which occurs when a government agency auctions off properties with delinquent property tax bills.

The homebuyer almost lost $65,000 in equity because of a clerical error. A DC Superior Court judge entered the wrong date on the court order – March 15, 2009 instead of March 15, 2010 – making it appear as if the one-year statutory appeal period on the tax sale case had expired.

In this case, there would be no one for the homebuyer to sue since a clerical error by a judge falls within the "governmental immunity" category. You are not allowed to sue a judge for a clerical error.

The homebuyer in this case elected to purchase an owner's title insurance policy for $521.

Because it appeared by the court order that the one-year statutory period for appeal had expired, the title company insured title to the homebuyer. The tax sale purchaser, after the title company had completed the closing and insured the new homebuyer, filed an appeal within the new one-year statutory period and prevailed.

The insured homebuyer was notified of the order awarding the tax sale deed to the tax sale purchaser, and in turn, filed a title insurance claim. The insured was immediately made whole by reimbursement of his purchase price and actual damages.

When presented with all the information, most of our clients elect to purchase the coverage. After all, in most cases the cost of an owner's policy is a drop in the bucket compared to the down payment the homebuyer had to save to buy the property.

In this case, the homebuyer paid $521 for an owner's title insurance policy that wound up saving him from the loss of his $65,000 down payment.

Rather than asking if an owner's title insurance policy is worth the expense and advising ways to cut corners at the closing table, why not encourage homebuyers to think of the owner's policy in a different way: What's an extra $521 at the closing table to protect the tens of thousands of dollars you saved for your down payment?

Owner’s title insurance: Is it worth the price?

Part 1 of a series

While a homebuyer is required to pay for the lender’s title insurance premium, the owner’s title insurance is optional to the homebuyer, and sometimes homebuyers who are looking to shave dollars off their closing costs consider opting out of the owner's title insurance policy.

They may feel having an owner's title insurance policy is not worth the expense.

A lot of misinformation about owner’s title insurance permeates the blogosphere and, in fact, one Washington DC metropolitan area real estate broker regularly advises homebuyers NOT to spend the extra dollars to purchase owner’s title insurance coverage.

Most of the blog entries by this broker are replete with misunderstandings of the coverage afforded to a homebuyer by the owner’s title insurance.

In an effort to combat these misunderstandings, I am offering an on-going series of “real life” examples of why owner’s title insurance is worth the price.

Title insurance and known title defects

"Don’t worry about it – title insurance will cover it!” ... This is what I keep hearing from agents when they talk to their clients about potential title insurance issues: “Don’t worry about it, you are getting title insurance – that will cover it!” 

My response: “Whoa!” 

The most recent instance was a District of Columbia tenant issue. I had to break it to the agent and the purchaser that the title insurance would not cover it and the underwriter would take specific exception to this issue because all of the parties were aware of the issue. 

One thing many folks do not seem to understand is that the title insurer literally steps into the purchaser’s (new owner’s) shoes and commences legal action based on the title issue at hand on behalf of the purchaser (new owner) and can only pursue a legal action the actual owner would be able to pursue. 

In other words, title insurance is to cover the unforeseen title issues.  If the purchaser, now the new owner, has knowledge of an issue or has waived the right to sue the seller for any title issues  it is difficult for the title insurer to pursue any legal action on behalf of the new owner. (Hint: look at the addendum to a contract for properties bought from a foreclosing bank or acknowledged tenants in the property, etc.)

So, before a purchaser becomes a new owner to a property with known potential title issues, that purchaser should consult the settlement attorney to fully understand what he or she is “signing up for.”

Title insurance doesn’t always “cover it.”

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