Title Insurance 101

Before the advent of title insurance as a commonplace part of the closing process, when a property owner or prospective property owner desired to obtain mortgage financing, among the processes put into motion was the search of the land records to determine the status of title to the premises to be mortgaged. This search was performed by a lawyer or other title searcher who would examine the chain of title by running each applicable name through the indices until all instruments comprising muniments of title were put together, along with other items, such as liens, etc., which might affect that title. Should this title searcher find a break in the chain of title, he or she would search outside of the land records, usually in the pertinent Probate Court or Superior Court records, for information which might serve to explain the gap in title. Similarly, the title searcher would check the town public records to ascertain whether any taxes or special assessments affected the subject premises. Once all this information was compiled, it would be given to an attorney who, after evaluating all of the information, would issue a certificate or opinion of title, stating that, based on the information, he or she is of the opinion that the property is owned by a particular person, subject only to those interests, liens or encumbrances specifically set forth in the opinion of title. In reliance on such certificates of title, lenders would make mortgage loans on property and potential purchasers would agree to go forward and close on the property.

This system had some weaknesses, though. Even the most competent title searcher can abstract only what is, in fact, on the public records. The searcher generally will not be able to uncover evidence of forgery, errors in tax records, inaccurately recorded documents or the existence of parties claiming title from other sources. In recognition of this, the attorney would qualify the title opinion by stating that the examination was limited to the abstract and did not encompass or reflect any information not available through a search of the land records. Should a title defect eventually become apparent, the lawyer would be responsible to the client only for any negligence in the searching process and not for information undiscoverable by the searcher. In other words, should a loss occur which could not be attributable to the attorney's or searcher's negligence, the individual suffering the loss would not be able to seek reimbursement from the attorney or searcher. Even if the loss were attributable to the attorney's negligence, a time element often came into play, since statutorily, there is a prescribed period of time within which one can bring an action against an attorney in connection with title opinions. Should there be a loss, would it become evident in time for suit to be brought within this prescribed period? If not, the party suffering the loss would forever be unable to sue the attorney for the alleged negligence.

Common sense dictated that a better, more complete means of title assurance be found, one which would cover risks above and beyond those matters set forth in the normal title abstract and title opinion. The means employed to provide this added protection was title insurance.

The title insurance premium is based upon the amount of coverage in the policy and the type of policy that is issued. As noted in the section called “How is title insurance like (and unlike) other types of insurance?” there is only a single premium charge for title insurance, and the protection afforded by the policy lasts for at least as long as the insured has an interest in the property. (In the case of an owner policy, the coverage may last even after the insured has transferred the property, as to any warranty covenants contained in a deed from the insured to the purchaser of the subject property.) The single premium feature of title insurance differentiates it from other types of insurance that require additional periodic payments for continuation of coverage.

As noted above, the premium is based upon not only the amount of coverage, but also the type of policy that is issued. The premium rates for an owner policy are higher than the premium rates for a lender (mortgagee) policy, given that the coverage afforded by the owner policy is much broader. Similarly, the premium for an expanded coverage policy is higher than that charged for a standard policy. (See the section called “What types of policies are there?” for further information on this topic.)

As noted in “What types of policies are there?” generally the owner/borrower pays the title insurance premium for the mortgagee (lender) policy, as an element of the closing costs typically assumed by the borrower. The mortgagee policy, however, protects only the lender’s interest. In order to encourage the purchase of owner’s coverage, there are reduced rates when an owner policy and mortgagee policy are purchased simultaneously. This gives the borrowers a significant premium discount when they purchase an owner policy to protect their own interests. There are also premium discounts when a new mortgagee policy is issued in the event of a mortgage refinance.

When you apply for a mortgage loan, your lender may be able to give you an estimate of the premiums that will be charged for both the lender and the owner policy. Your attorney or title insurance agent will advise you as to the exact premium that will apply.

Title insurance does not remove the necessity and desirability of searching title to property. Rather, title insurance is designed to complement a title search, not to replace it. The process still begins with a search of the relevant public records. In the course of this search, defects in the title are identified so that, to the extent possible, they can be eliminated. Title insurance is not a substitute for this process. It simply supplements the lawyer's examination and opinion of title by providing financial indemnity to the insured in the event of a loss due to circumstances adversely affecting an insured interest.

What can the title insurance policy do that the title search can not? One major difference is that the title search can do no more than report on what is actually revealed in the public records available to the abstractor. Those records may not reflect such things as missing heirs, fraud, forgery and many other potential title defects which cannot be disclosed by even the most careful and accurate search of the land records. By protecting against such non-record matters, title insurance offers to the insured protection beyond what even the most competent attorney can provide.

This "most competent attorney," however, can make mistakes and suffer errors of judgment and errors of omission. The harmed party cannot always recover losses from an attorney, due to the inability to prove negligence, or, as described above, the failure to bring suit within the statutorily prescribed period of limitations. With title insurance, however, protection normally continues so long as the insured retains an interest in the subject property, and that protection is backed by the financial strength and corporate longevity of the title insurance company.

Another benefit that title insurance provides over and beyond the assurances of a certificate of title, is the protection which title insurance provides to lenders who originate a loan with the intention of selling that loan on the secondary market. While a secondary market investor located across the country may not want to have the title to its investment rest solely on an opinion of title generated by a local attorney, that investor will readily accept a title insurance policy backed by the resources of a title insurance company.

Title insurance is like other types of insurance in that it is basically a contract between the insurer and the insured whereby the insurer agrees to reimburse the policy holder, up to a specified sum, should a loss be sustained against an insured interest. The insurance company assumes this risk, collects its premium and spreads the risk among all of its policy holders. This is the basic principle upon which all insurance rests, that in order that an individual not have to bear the entire risk for a particular loss, a smaller amount is paid to an insurer who agrees to accept and assume the risk of loss. This element of risk assumption and risk spreading is common to all types of insurance, whether it be fire, auto, life or title insurance.

Title insurance is different from other types of insurance, however, in that it is retrospective; it is designed to protect an insured owner or lender from losses arising from defects occurring prior to the date of the policy. In essence, the title policy operates as a "snapshot" of the title to the property at a particular point in time - if the title to the property is other than as "shown" in the snapshot, and a loss is suffered as a result, then the policy holder is protected under the terms of the policy. Since title insurance operates retrospectively, it lends itself to risk elimination, whereby known risks are dealt with prior to the issuance of a policy, e.g., mortgages lacking releases are tracked down, questionable documents are investigated, necessary documentation is obtained, etc. (Of course, not all title risks can be eliminated, since many potential title defects are not generally discoverable, such as misindexed liens or forged signatures.) Other types of insurance, however, are prospective, in that they insure against future occurrences, and do not lend themselves to risk elimination.

Another way in which title insurance differs from other types of insurance concerns the premium structure. There is only a single premium charge for title insurance, and the protection afforded by the policy lasts for at least as long as the insured has an interest in the property. (In the case of an Owner Policy, the coverage will last even after the insured has transferred the property, as to any warranty covenants contained in a deed from the insured to the purchaser of the subject property.) Other types of insurance, however, run for a specified period of time, such as year-to-year, and require additional periodic payments for continuation of coverage.

There are owner policies and mortgagee, or lender, policies. The owner policy protects the owner of the property, while the mortgagee policy protects the lender who has agreed to provide financing to the owner of the property. Generally, the owner/borrower pays the title insurance premium for the mortgagee policy, as an element of the closing costs typically assumed by the owner. For this reason, owners tend to believe, albeit erroneously, that they have received title insurance coverage when buying a mortgagee title policy for their lender. To the contrary, the owner receives no title insurance protection unless he or she also purchases an owner title policy. In order to encourage the purchase of owner's coverage, there are reduced rates when an owner policy and mortgagee policy are purchased simultaneously.

Most policies issued are so-called standard policies, whether owner or mortgagee. The vast majority of policies are "ALTA" policies, which means that the policy has been accepted by the American Land Title Association. (ALTA is a trade association which represents the interests of the land title industry on a national level.)

A new type of policy, however, offers additional protection to the insured, and is called an "expanded protection" policy. This type of policy insures against loss or damage suffered under a number of new and additional risks, e.g., forced removal due to the violation of zoning law, forced removal due to the failure to obtain a building permit, etc. Some lenders are beginning to require that an expanded protection mortgagee policy be issued, rather than a standard, "ALTA" mortgagee policy, given the additional coverage the new policies provide to an insured. The expanded protection policy is issued for an additional premium, given the additional risk shouldered by the title insurance company.

The owner policy insures, as of the effective date of the policy, against loss or damage sustained by the insured owner, by reason of:

• title vested other than as stated;
• any defect in, or lien or encumbrance on such title;
• unmarketability of the title; and
• lack of a right of access to and from the land.

The owner policy also provides that the title insurer will pay the costs, attorney's fees and expenses incurred in defense of the title, in accordance with the policy's terms.

The mortgagee policy insures, as of the effective date of the policy, against loss or damage sustained by the insured lender, by reason of:

• all four items mentioned above, under owner policy coverage;
• the invalidity or unenforceability of the lien of the insured mortgage;
• the priority of any lien or encumbrance over the lien of the insured mortgage;
• the statutory lien for labor or materials which has, or may gain, priority over the lien of the mortgage (the so-called "mechanic's or construction lien"); and
• the invalidity or unenforceability of any assignment of the insured mortgage, or the failure of the assignment to vest title in the insured assignee.

The mortgagee policy also provides that the title insurer will pay the costs, attorney's fees and expenses incurred in defense of the title or the lien of the insured mortgage, in accordance with the terms of the policy.

One common type of claim made under a title insurance policy concerns errors made in searching the title to a particular parcel. For example, there may be a mortgage of record, or a tax lien of record, which was not discovered for one reason or another in the search of the title. The failure to discover the item may be due to an error by the title searcher, or it may be attributable to a misindexing of the item by the town clerk.

Claims have been received which relate to forged deeds, forged releases of mortgages, fabricated or expired powers of attorney, undisclosed heirs, inadequate property descriptions and ineffective waivers. Other claims are made in response to a neighboring property owner's assertion of a right to use the subject property in some fashion which is incompatible with the interests of the insured owner.

Resolution of a claim, obviously, depends first on whether the particular claim made is in fact covered by the policy, i.e., has there been a loss and is that loss insured against by the policy issued to the claimant. If an exception had been taken in the policy for the matter complained of, then there would not be coverage. For example, if an owner title policy contained an exception for matters which a survey would have revealed, then a claim made relative to the encroachment of a neighbor's fence onto the property would not be covered under the terms of the policy, since the encroachment would have been revealed by a survey of the property.

A commitment is an agreement by the title company to insure the title to certain property, taking exception only for those matters set forth in the commitment and for any title matters recorded between the date of the commitment and the date of the policy issuance. The commitment is based on a current title search and reflects the title as of the date of that search. The commitment resembles a title insurance policy in that it sets forth similar information. Usually, however, the actual title policy eventually issued will in fact contain fewer exceptions to coverage than did the commitment. This is because the commitment reflects matters of record as of the time of the title search, and some of those matters may be resolved or otherwise disposed of prior to the closing and the issuance of the title policy. For example, the commitment may refer to an unreleased mortgage of record, but, prior to closing, arrangements may be made for a release of that mortgage. The title policy issued will not, therefore, refer to the mortgage as an exception to coverage, since it no longer affects the title to the subject property.

Commitments once were used more extensively than they are now. This was due to the fact that in the past title insurance companies generally did not authorize attorneys or title agents to issue policies directly and thus there was no policy presented to the lender at the closing. The commitment served to provide the lender with the title information that would ultimately be put on the policy. The commitment was prepared by a local office of the title insurance company and was based on a title report and certificate submitted by an approved attorney. At the closing, the lender's attorney often would require that the attorney "mark up" the commitment to reflect matters that would not be contained in the title policy eventually issued.

The current prevailing practice of lenders is to require that the actual title policy be provided at closing, and most title agents are authorized by their title companies to issue title policies directly.  There is no charge imposed by the title company for the issuance of a binder, and the regular premium shall be paid for the title policy ultimately issued.

The title policy does not insure against matters excluded from coverage, nor against matters which are exceptions to coverage.

The scope of the title agent's authority under the typical title insurer/agent relationship is limited to the issuance of a title policy on the insurer's behalf. Matters such as an agent's fraud or negligence are not covered by this relationship because they are deemed to be outside the scope of the agent's authority. As a result, the title insurance company is not usually liable to third parties for such negligence or fraud by its agent except under the policy or policies issued by the agent.

Driven in part by the evolution of the secondary market for mortgage transactions, the insured closing letter was initially designed to provide the national lender or investor with additional protection in the event that the approved attorney or settlement agent failed to comply with the lender's closing instructions or the approved attorney or settlement agent mishandled funds in closing the transaction. Lenders requested agreements from insurers whereby the insurers would provide protections to the lenders as to these concerns. Eventually the American Land Title Association (ALTA) developed its closing protection letter that is now recognized throughout the title industry and is accepted by most lenders.

The closing protection letter, also known as an insured closing letter, provides that the title insurer agrees to reimburse and indemnify the insured party for any direct loss or damage which results from either:

1. the failure of the insurer's agent to comply with the lender's written closing instructions; or
2. any fraud or dishonesty of the agent in handling the lender's funds or the closing documents.

The typical closing protection letter contains a few exclusions from coverage, whereby the title company is not liable to the lender under the terms of the letter. For example, there is no coverage for the loss or impairment of the lender's settlement funds due to bank failure, insolvency or suspension of banking privileges, except that which results from the agent's failure to comply with the lender's written instructions to deposit the funds in a designated bank.

As mentioned above, all title policies contain some exceptions to coverage, even if it is only a single exception for real property taxes. These exceptions are for the liens, easements and other encumbrances which will not be considered as causing loss or damage to the insured, since it is known that they take priority over the title of the insured. Because these are matters for which the insurance company will not pay a claim if, in fact, they do result in loss or damage to the insured, it is in the interest of the insured to have these exceptions drawn as narrowly as possible to exclude as little as possible from the coverage of the policy. Affirmative language was developed to do precisely that. Affirmative language is insuring language developed for use in connection with the exceptions to coverage put into a title policy. Its purpose and effect is to expand the coverage of the policy by narrowing the exceptions to coverage.

Affirmative language was originated largely by government mortgage programs such as "Fannie Mae" (FNMA) and "Freddie Mac" (FHLMC) and by the secondary mortgage market - those banks and groups of private individuals who purchase mortgages as investments from the banks originating them. Other affirmative language was developed by the title companies themselves, generally in the form of endorsements to the policy in response to lenders' concerns about certain types of transactions. The requests for affirmative language are often made by the banks originating the mortgage in response to the demands of the secondary mortgage market or in response to the criteria set by a particular government mortgage program such as FNMA.

Sometimes conflict arises in the process of deciding which affirmative language is appropriate under a particular set of circumstances. For example, title agent may discover that a particular easement is not ascertainable and fixed, but the lender insists on obtaining affirmative language stating that the easement is ascertainable and fixed, or the title agent may discover restrictions which, in fact, do provide for forfeiture of title in the event of a violation, yet the lender insists that the policy state that there is no such provision. The lender's interest is in "packaging" the loan in a manner which will be acceptable to the secondary market, yet the title agent who is issuing the title policy on behalf of the title company is under an obligation to have the policy reflect the true state of the title to the property. Sometimes these problems and differences can be worked out by negotiation between the title company and the lender. Restrictions providing for forfeiture, for example, most frequently have to do with the use to which a property may not be put. If the property is, in fact, not being used for the forbidden purpose, affirmative representations may be made in the policy to that effect, which will frequently satisfy the lender and any secondary market purchaser. Should the problem be a utility easement which, from the recorded document, is not ascertainable and fixed, inquiry could be made of the utility company to determine where, in fact, the lines or pipes are installed, and a request could be made for a release of the utility's right to move the lines.

With cooperation between the lender and the title agent issuing the title policy, known risks can often be eliminated, minimized or affirmatively insured against in some fashion, to the satisfaction of both lender and title insurer. The sooner a potential problem is discovered, the less likely it is that it will be a real obstacle to closing.

Endorsements in some fashion change the terms of a title insurance policy. Some endorsements are corrective in nature in that they correct an inaccurate statement in a policy. For example, a lender's name, or a borrower's name, may be misspelled in the policy and an endorsement is needed to change the policy to reflect the correct spelling. The date of a mortgage, or the dollar amount of coverage on a policy may need to be corrected, or the date of recording may be inaccurate. Endorsements to the policy serve to correct this inaccurate data so that the policy reads as the lender intended it to.

Other endorsements are not of a corrective nature, but, rather, are designed to add to or change the coverage of the policy. Over time a large number of standard, preprinted endorsements have evolved to meet the needs of lenders and the secondary market. Most of these endorsements are provided free of charge to the requesting party.

One common endorsement is the "Affirmative Language" endorsement, which contains standard FNMA/FHLMC affirmative language to be used in connection with the issuance of mortgagee title policies on residential property. This endorsement provides general affirmative language as to certain exceptions typically taken in a mortgagee policy. (See above for a general discussion of affirmative language.) Other standard endorsements are the "Condominium" endorsement, for use on policies insuring units in condominiums, the "Variable Rate" endorsement, to be used for loans with a variable rate feature and the "Consumer Revolving Loan" endorsement, to be used with policies on consumer revolving loans ("home equity loans"). Dozens of other types of endorsements exist, and usually the lender's needs can be accommodated with either a standard endorsement or an endorsement specially designed for the needs of a particular lender or a particular transaction.