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TITLE INSURANCE POLICIES: What They Are and Recent Changes
Purpose of Title Insurance:
Everyone who purchases a single family home, and who finances it through a mortgage loan, knows that the lending institution will require a Title Insurance Policy. The purpose of Title Insurance is to protect the bank against claims that might jeopardize the priority of its mortgage, or impact the title of the buyer who is giving a mortgage as security for the bank loan. This is called a Mortgagee Policy.
The buyer can concurrently acquire Title Insurance for his/her own benefit at a discounted rate. This is called an Owners’ Policy. Title Policy premiums are paid at closing and are based upon the amount of insurance being purchased. The Title Insurance Policy is effective during the period of ownership, without additional premium.
Revised ALTA Approved Policies:
In 2006, the American Land Title Association (ALTA) approved new Standard Loan and Owner Policies, which like the predecessor forms, have insuring provisions, exceptions, exclusions and conditions. The new Owner and Mortgagee Policies insure against loss resulting from the following title defects: fraud, unauthorized transfers, improperly executed documents, invalid powers of attorney, defective judicial/ administrative proceedings (i.e. forclosure).
Also covered by the Policy are unpaid taxes or assessments, encroachments that would be disclosed by a survey, zoning violations if notice of the violation is recorded, eminent domain if notice of the same is recorded, and creditors’ rights from certain preferential conveyances resulting from defective recording. There is also “gap” coverage for insurable claims occurring between the Date of Policy and the date of recording the mortgage. There are some new inflation protection provisions that may eliminate the need for an Inflation Endorsement.
As with any insurance policy there are standard Exclusions as well. The following represent some of these Exclusions: matters created or assumed by the Insured Buyer, governmental regulations without recorded notice, eminent domain without recorded notice, certain creditors’ rights not otherwise included in the ‘Covered Risks’, and taxes imposed during the gap period.
Expanded Definition of Insured:
Under the ‘Conditions’ section of the Title Policy, the definition of ‘Insured’ has been broadened. It now includes conversion to another kind of entity, successors in title resulting in a “no consideration” transfer from the Insured to a grantee, when the grantee: wholly owns the named Insured or has stock/equity interests that are wholly owned by the Insured. The Insured also includes a grantee who is a trustee or beneficiary of a trust created for estate planning purposes.
State Variations and Exceptions:
Title Insurance Policies may differ from State to State. Be sure to read your Policies carefully and ask your attorney to explain any provisions that you do not fully understand. Some Exceptions in the Mortgagee Policy can be deleted if a Form 100 is signed by the Seller. This is an Affidavit that discloses that there are no parties in possession, possible mechanics’ liens or matters that would appear on a property survey. In the Owners’ Policy however, only an actual survey will permit deletion of the survey exception. As suggested in this example, there are coverage differences between the Owners’ Policy and the Mortgagee Policy.
Arbitration and Definition of Indebtedness:
Arbitration is mandatory if demanded by either party when the claim is two-million dollars or less. If over two-million dollars, both parties must agree to arbitration.
The definition of Indebtedness has also been expanded to include not only principal and interest, but prepayment penalties, foreclosure expenses, and advances to prevent waste. The new policy also allows for cumulative liability, when multiple mortgages are insured.
The new ALTA Title Insurance Policies are easier to understand and include additional coverage that benefits the Insured. Various ‘Endorsements’ provide expanded coverage that may be deemed appropriate by your legal counsel. Having an attorney to guide and represent you at the real estate closing, will also ensure that you are selecting the correct Title Insurance for your property.
For more information, please contact Attorney David A. Baram.