What your buyer should know about Title Insurance

by Steven R. Mills, Esq, Attorney at Law, Chicago Title Insurance Company

One of the most important—and sometimes most difficult—tasks of a REALTOR® is to walk your buyer through the myriad details of the real estate transaction that arise after the contract has been signed. 

A transaction’s typical post-contract chain-of-events includes conclusion of the REALTOR® and buyer’s due diligence period(s), initiation of the title search and examination period and culminating with the issuance of the commitment for a title insurance policy. These events are then followed by a seemingly endless stream of paperwork to ensure all appropriate steps have been taken.  Since the risks of not performing the due diligence searching and examination can be so costly to your buyer, making sure the title to the real estate is clear is almost as important as finding your buyer’s dream home.

Due to the intrinsic value of real estate, over time, countless laws have been enacted to ensure that all property owners and their heirs secure exceedingly strong legal rights and protection to their properties. Notwithstanding these protections, others may also claim significant rights to the property, such as a mortgage, lease, easement or lien.   As a result, the title search and ensuing title insurance policy play a critical role in every real estate transaction.

It is only through the title search and subsequent title insurance policy that your buyer is insured against future losses due to disclosed or in some cases undisclosed risks that might negatively impact their ownership of the property. 

What is a title search?

A title search is a thorough examination of all relevant public records to discern the status of the record title to a particular piece of property. You have undoubtedly heard of the “Bundle of Sticks” theory as a way to explain an owner’s legal rights to his or her property.  Under this theory, all possible rights to real property are represented by a “stick” in the bundle, and the title search is simply an examination of previous public records involving the property to determine if any “sticks” have been added or removed from the bundle. Looking into the past and uncovering any added or missing rights allows your buyer to conclude the transaction with a greater knowledge of exactly what they are buying. 

The title search is used to determine the Chain of Title to a property. The Chain of Title is the continuous record of all historical transfers related to the property.  A search of the Chain of Title will reveal not only the ownership history of the property, but also any specific interests to the property that may have been added (or taken away) over the years.  Property interests or encumbrances such as liens (rights to a property as collateral for money owed), lawsuits, probate matters, previous mineral or air rights and other such rights may give outside parties preexisting rights to all or part of the property.  Even though the property may later be sold or transferred without the knowledge of the holder of the interest, the new owner takes the property subject to such interests unless they are released.

For example, a few years ago we were asked to run a title search and prepare a closing for the sale of a house, which, unbeknownst to the seller, had been built directly over an active 24" sanitary sewer line. Further inquiry disclosed the sewer line was properly located within the boundaries of an easement granted to the City of Columbus as shown on the recorded subdivision Plat.  Amazingly, the previous owner had managed to build the house directly above the active sewer line. When our search and the corresponding mortgage location survey discovered the problem, the buyer, to say the least, exhibited significant hesitancy in completing the purchase and the contract was eventually voided.

When asked by the buyer how this issue could have gone unnoticed during the seller’s purchase of the property, we discovered that the seller had not been represented at that purchase (by either a REALTOR® or an attorney), had paid cash and no title search or survey of the property had been performed.
 
What is title insurance?

Most insurance policies insure the policyholder against a loss from some specific future event such as a fire, collision or some other casualty loss that has not yet occurred. Title insurance, on the other hand, is unique in that it insures the policyholder against a loss arising from some event occurring during the property’s previous history. Title insurance is also unique in that coverage continues for as long as the property is owned by the insured and is paid by a one-time premium and is collected at closing. As has been the custom in the Central Ohio area for years, the cost of the title search and owner’s policy are, by contract, a seller’s charge, and it remains so in the most current adaptation of the CBR/CBA contract revised on March 1, 2004.

So what does the policy actually cover?  In essence, the policy covers the insured owner against loss from any encumbrance, right or interest of record that is not discovered during the title search.

However, the policy’s protection does not stop there because coverage is also extended to losses resulting from many hidden risks, which would not normally be disclosed by the title search.  For example, the policy contains coverage against fraud or forgery in a previous conveyance; undisclosed heirs who may claim an interest in the property; a lingering right from an undisclosed or incorrectly stated marital right; or a defective deed in the previous chain of title.

One of the biggest features of the policy is that if such a claim occurs, the insured will be defended by an attorney provided free of charge by the title company. Also, in the event the claim proves valid, the insured is reimbursed for their loss up to the amount of the policy (typically the purchase price of the house).  
 
Choosing a title company

When selecting a title company, it’s important that your buyer is insured by a company with sufficient claim reserves to back its policy.  The insurer must not only be able to cover the loss of a $120,000.00 residential property, but must also be able to cover a multi-million dollar loss from a commercial project. It is also a good idea to deal with an insurer you know.  As you are probably aware from local news reports, several title agencies, as a result of either fraud or mismanagement, abruptly ceased operations leaving many of their customers with unrecorded deeds and unpaid mortgages.  As a result, many of these property owners lost their investment and some later discovered they did not have adequate legal recourse.  While these situations are rare, they do underline the need to deal only with a title company with a proven track record.      

It is by working with a reputable, experienced title insurance company, one with employees who not only show attention to detail but also ethical behavior and integrity, that you can help your buyers avoid any pitfalls of future claims to their title.