April 8, 2015 | by Joe Gentile
Insurance is one of those necessary evils in life. You purchase a policy and hope you never have to file a claim. And in the meantime, you send a regular payment to your insurance company “just in case.”
That’s true of all but one type of insurance. Unlike other policies, title insurance is a one-time fee paid at closing. It protects your financial stake in the property you’re buying should an unforeseeable claim arise in the future. A claim could stem from anything from fraud or identity theft to encroachment or mortgage liens.
Without an owner’s title insurance policy, the legal costs to hash out a title claim would be in the tens of thousands of dollars paid directly out of your pocket. Not to mention you could lose the money you’ve invested in your property such as your down payment and any improvements you’ve made.
A frequent refrain we hear from our clients is “Why do I need title insurance when you have already done a title search?” Not only does title insurance cover mistakes made during a title search, it also covers a gamut of issues that even the best title search cannot reveal.
For example, a title search cannot detect a forged document, or definitively identify a faulty legal description, or account for the indexing mistakes and tardy record-keeping at the government clerk’s office.
So title insurance not only covers issues that are made available in the public records through a title search, but, more importantly, it covers issues that do not necessarily appear or may not be apparent among the public records.
Title insurance claim rates are approximately 5 percent, relatively low when compared to other forms of insurance, which often invites skepticism among prospective homebuyers.
However, missing from this statistic, are the title snags we encounter that do not result in direct claims by an insured home seller. In many cases, the seller is not even aware of the behind-the-scenes curative work that has been done for the seller to convey insurable title to their buyer.
Title problems arise in 25 percent of real estate transactions, according to the American Land Title Association and, in our daily operations, we encounter a title snag in about every one in 10 closings, which requires a resolution before we can insure clear title.
The most common snags arise in the case of unreleased mortgage liens or defective vesting deeds in which the title company-to-insure contacts the title company that previously insured the seller and obtains the proper curations or obtains a letter of indemnification from the prior title insurer – and this is all done without the seller having to make an actual claim against her title insurance policy.
Of course, if the seller did not obtain owner’s title insurance when she originally purchased the property, the seller would be responsible for her own legal expenses to correct these title snags, not to mention the added stress and likely closing delays that can result in a breach of contract and loss of sale.
But for home sellers who purchased an owner’s title insurance policy, the title companies work together behind-the-scenes to achieve insurable title and consummate the closing.
The cost for an owner’s title insurance policy for a home in the District of Columbia listed at the current median sales price of $474,000, and assuming a 20 percent down payment, is around $1,100. Over the average duration of home ownership, that spreads out to about $85 annually or about $7 per month. The cost thins out even more the longer you own your property, yet the protection of your owner’s title insurance policy stays the same.
As far as insurance policies go, this seems like a pretty good deal. But for some reason, title insurance gets dismissed as guff more than most types of insurance policies. Some would even go so far as to advise against purchasing an owner’s title insurance policy all together. This is such a head scratcher for us in the business.
Title insurance is one of the most affordable insurance policies you’ll buy, and it protects one of the biggest financial investments you’ll ever make. Why wouldn’t you want to insure your investment?
Joe Gentile is an attorney at Federal Title & Escrow. He has practiced real estate law in the D.C. metro area since 2000.