Owners’ Policies of Title Insurance and Why You Need One
Article also featured in Lexology online.
When I first started practicing real estate law in 1999, there was a perception that it was the exception, not the rule, that attorneys advised their purchaser-clients to obtain an Owners’ Policy of Title Insurance (also known as a fee policy of title insurance and for purposes of this article, I will use the term “fee policy”) at the time of closing. The most common argument against the fee policy was that the purchasers, assuming they had obtained an institutional mortgage, had as part of their closing costs purchased a loan policy of title insurance, which just like it sounds insured the lien of the loan which the purchasers had just signed. The logic appeared to have been “why spend the extra money on this insurance policy when the loan policy will take care of any title issues which arise?”
Fast forward to today, when I recently heard a very highly respected real estate practitioner opine that it was tantamount to malpractice not to strongly encourage the client to purchase a fee policy. I don’t know if it rises to the level of malpractice, but I think the message is clear: attorneys should be advising their clients to pay the additional expense of fee policies at the time of closing. We recommend this to all of our purchaser-clients and almost across the board, the clients are obtaining the fee policy. The logical question is “what’s changed?” The simple fact of the matter is that people are becoming more litigious as to real estate title issues with a commensurate increase in the number of claims being filed against title insurance policies. In fact, local Agency Counsel for Fidelity National Title Group estimates that the number of claims filed has doubled over the past five years. And since, as the counsel noted, most claims are filed within a year of closing, the door remains open to a potential malpractice claim should the matter not resolve itself to the client’s liking.
The loan policy that purchasers were told would take care of the title problem is doing just that, curing the title problem but not in favor of the purchaser/owner of the property, but in favor of the lender.
Let’s say, for example, that John Owner has owned commercial property at 123 Main Street where he has run his manufacturing business for several years and purchased the property using loan proceeds secured by a mortgage (paying for a loan policy of title insurance as a closing cost) and was not advised to get a fee policy, so he relies on his attorney and declines the fee policy. One day, John is served with a summons & complaint on behalf of Peter Plaintiff, in which Peter asserts that he is in fact the owner of 123 Main Street as the deed conveying the property into John’s name was fraudulently executed and delivered to John at the time of his closing. John’s lender, who has also been served as part of the action, files a claim against the title insurance policy. The title company performs its job but the court agrees with Peter’s argument, and renders judgment in his favor, which amounts to a complete “failure of title.” Now John, relying on what his attorney told him at the time of closing, has been sitting back, thinking that his interests are being taken into account and is completely surprised when Peter has filed an action for eviction to get John out of the property, which has now been determined to be Peter’s.
What did the title policy do, you ask? It paid off the mortgagee up to the amount remaining due under the note. Thus, the lender has been made whole, which is exactly what the loan policy was designed to do—insure the interests of the lender in the property and John is left on his own to deal with the fallout—moving his manufacturing equipment at potentially great expense or scrambling to negotiate a lease with Peter for the space.
This example is deliberately extreme. However, it illustrates why a purchaser would be wise to spend the additional expense on a fee policy. Among others, there are several points which illustrate why a prudent purchaser should invest in a fee policy.
One relates back to the loan policy. If a lender sees so much value in a loan policy that they make the purchaser pay for a policy which insures the loan, then the title insurance in and of itself has value. If the loan is worth insuring, shouldn’t the title to what will most likely be an important investment—commercial space where a business is being run or investment property—also be insured to protect the business owner/investor? Along similar lines—your clients will spend at least several hundred dollars every year for a hazard insurance policy to insure the structure of their commercial/investment property—why not encourage your client to spend a one-time expenditure which will insure the land the commercial/investment property is built on?
Another key factor is how long a fee policy provides coverage. Whereas a hazard insurance policy generally must be renewed annually, a fee policy continues to provide coverage for as long as your client owns the property. Furthermore, the policy insures a successor in interest to the insured party resulting from the conversion to some other kind of entity or is a successor in interest due to merger, consolidation or reorganization. Thus, if your client were to purchase the property as an LLC, the subsequent merger with another LLC would not result in a cancellation of the policy. Therefore, it is conceivable that you could have decades of coverage, again, for a one-time payment of the fee policy premium.
Another consideration when your client is making the choice of whether or not to purchase a fee policy is that the cost of a fee policy, when purchased at the same time as a loan policy, is reduced from what would normally be charged to a much lower rate (known as being charged the simultaneous rate). A policy which would typically cost $4,000.00 can be obtained for $1,300 at the simultaneous rate. This can be proven by using any title companies’ rate calculator, which is provided on most companies’ website as a link. See, for example, http://ratecalculator.fnf.com/?state=ny&id=chicagotitle and https://www.oldrepublictitle.com/rate-calculator/new-york and enter the same information (purchase price and loan amount) with each calculator. The rate quotes should be identical or, at most, off by a dollar or two. That is because regardless of what company is elected to be used to provide the title insurance policy (whether loan or fee), the rates in New York State are predetermined in New York by the Title Insurance Rate Service Association (TIRSA), an association of title companies which conduct business in New York State. So there is no difference in the fee policy premium using Company X as opposed to Company Y.
So how does a fee policy work? Essentially like any other insurance policy. If someone asserts a claim against the title to your client’s property and it is a claim against which the policy insures, your client, as the insured, submits his or her claim with the title company and lets them take over from there. The fee policy includes coverage for attorneys’ fees and court costs from initial filing of the claim to ultimate resolution of the matter, whether by settling the matter or prevailing in the litigation. The fact that attorneys’ fees are covered is yet another reason why a fee policy makes sense. Without a fee policy, you are paying out of pocket for attorneys’ fees, for which a simple initial consultation and the most preliminary of initial investigation on the part of the attorney could easily cost you the same, if not more, than the premium for a fee policy.
What claims does a policy defend against? A non-exhaustive list includes (a) lack of capacity to execute the deed; (b) a mistake made by the abstractor (i.e., a missed mortgage); (c) deeds executed by persons with invalid or expired powers of attorney; (d) a deed which has been delivered without the consent of the owner or after the death of the owner; (e) fraud in the execution and delivery of the deed, as in the example above. What is not covered are defects of which the new owner has knowledge or the stated exceptions in the policy. These tend to be easements, rights of way, covenants & restrictions and the exceptions which are disclosed by a survey of the premises.
An obvious question is how much coverage is available? The standard is that the insurance coverage is limited to the purchase price of the property. However, if your client can prove a certain dollar amount of improvements which are going to be made to the property, the insurance company generally will allow for an increased coverage amount. For example, a buyer purchases a vacant lot with the intent to build on it. If the buyer takes out a building loan mortgage for the costs of building a warehouse, the title insurance company generally will allow you to purchase coverage up to the building loan amount.
As they say, times change. What used to be discouraged is now encouraged as a matter of course. Fee policies offer another layer of protection to your clients’ investment in whatever property they are purchasing. The additional cost at the time of closing will help to save your clients a great deal of headache and out of pocket expense later on.