Don’t Forget the Title Insurance

Guest article by Greg Fencik:

In real property law, title is the means whereby a person’s right to property is established. Title should not be confused with a deed. A deed is merely a piece of paper that serves as evidence of title. The possessor of a deed may not, in fact, have legal title to the property described in a deed. For example, a deed may be forged. A deed may be one of multiple deeds issued by a prior property owner. A deed may stem from a deed that was one of multiple deeds issued by a prior property owner. There may be a mistake in the description of the property in a deed. In these instances, the person who has the deed may not have legal title.

Title isn’t just a piece of paper, be it a deed or otherwise. Title is the right to do with the property whatever the title holder sees fit (provided, of course, that it’s legal). Title insurance is a means by which buyers of real property and mortgage lenders protect their respective interests in the property against losses due to flawed titles.

Most people are familiar with health insurance, auto insurance and homeowner’s insurance. Each of these types of insurance provides coverage against future losses – things that may occur in the future. For this future coverage, healthcare insurers, auto insurers, and homeowner’s insurers charge periodic premiums from the date of purchase of the respective policy until the policy is cancelled or non-renewed.

Title insurance provides insurance against defects in the title to real property. Title insurance ensures that the purchaser/owner of real property to which the policy applies has legal title – the right to do with the property whatever the title holder sees fit (e.g. develop the property, sell the property). Unlike providers of healthcare insurance, auto insurance and homeowner’s insurance, title insurers charge a one-time premium for the provision of what is essentially a lifetime insurance policy. There are a number of title insurance providers in Florida – First American Title, Stewart Title Guaranty Company, Old Republic National Title Insurance Company, and Fidelity National Title of Florida, to name just a few.

In Florida, title insurance is regulated by statute and by administrative rules. See, generally, Fla. Stat. §§ 627.7711 – 627.798.

Florida statutes define a title insurer as:

Any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. Fla. Stat. §627.7711(3).

By statute, title insurers are obligated to perform title searches and to examine information upon which a determination can be made that there is valid legal title:

A title insurer may not issue a title insurance commitment, endorsement, or title insurance policy until the title insurer has caused to be made a determination of insurability based upon the evaluation of a reasonable title search… has examined such other information as may be necessary, and has caused to be made a determination of insurability of title… in accordance with sound underwriting practices. Fla. Stat. §627.7845(1).

A title search is “the compiling of title information from official or public records.” Fla. Stat. §627.7711(4). What constitutes such other information as may be necessary is not defined by statute. It stands to reason that a title insurer will engage in a thorough investigation of title before providing insurance for the title so as to minimize the likelihood that it will have to pay a claim. [1]

Title insurance is issued to owners and/or to lenders (e.g. North American Savings Bank or NASB). Title insurance policies are, thus, referred to as owner’s policies and lender’s or loan policies, respectively. First American Title explains the difference here.

The premium charged for title insurance in Florida is dictated by statute and by administrative rule. SeeFla. Stat. §627.727, Fla. Admin. C. 69O-186.003. The premium charged for an original owner’s policy is a function of the value of the property to which the title applies:

Fla. Admin. C. 69O-186.003(1)(a)1.a. [2]

The premium for a loan policy, which the Florida Code refers to as original mortgage title insurance, is the same. For a one-time premium, title insurance policy holders obtain insurance against a number of covered risks. Covered risks typically include:

1. Someone else owns an interest in the title.
2. Someone else has rights affecting the title because of leases, contracts, or options.
3. Someone else claims to have rights affecting the title because of forgery or impersonation.
4. Someone else has an easement on the land.
5. Someone else has a right to limit the use of the land.
6. The title is defective due to:

6.1 Someone else’s failure to have authorized a transfer or conveyance of the title.
6.2 Someone else’s failure to create a valid document by electronic means.
6.3 A document upon which the title is based is invalid because it was not properly signed, sealed, acknowledged, delivered or recorded.
6.4 A document upon which the title is based was signed using a falsified, expired, or otherwise invalid power of attorney.
6.5 A document upon which the title is based was not properly filed, recorded, or indexed in the public records.
6.6 A defective judicial or administrative proceeding.

In the event a policy holder suffers a loss as result of a covered risk, the title insurance company will generally do one or more of several things:

1. Pay the claim.
2. Negotiate a settlement.
3. Bring or defend a legal action related to the claim.
4. Pay the policy holder the amount required by the policy.
5. End the coverage of the policy for the claim by paying the policy holder the actual loss resulting from the covered risk, and those costs, attorneys’ fees and expenses incurred.
6. End coverage for certain risks by paying the policy holder the amount of the insurance then in force for the particular covered risk, and those costs, attorneys’ fees and expenses incurred up to that time.
7. End all coverage of the policy by paying the policy holder the policy amount then in force, and those costs, attorneys’ fees and expenses incurred up to that time.
8. Take other appropriate action.

Given all of this, it should be obvious why lenders such as NASB require title insurance. To understand why purchasers of real property, such as IRAs should insist upon title insurance for themselves, consider the following hypothetical scenario:

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. All that is obtained is mortgage loan insurance or a loan policy; there is no owner’s policy obtained.
5. The loan policy is obtained from a company such as First American Title.
6. The IRA pays for the title insurance. [3]

In this scenario, the cost of the insurance policy would be $402.50 (the premium is a function of the amount of the loan, $70,000, not of the value of the property). That cost would be paid by the purchaser (the IRA) as part of the cost associated with obtaining the financing – it was required by NASB.

In this scenario, because the policy is a loan policy, the policy would only protect NASB. The limits of coverage would initially be $70,000 (the amount of the loan), not $100,000 (the value of the property at the time of the purchase). The amount of coverage would decrease as the loan to NASB is paid off until, eventually, when the loan to NASB is paid in full, there would be no coverage at all.

Now, in this scenario, First American Title likely did a good job investigating the title of the property. It was obligated to do so by statute, and good business practices would dictate as much, as well. As such, one might think: though the IRA did not obtain a title insurance policy in its name (an owner’s policy), it did, nevertheless, have the benefit of the title search and assessment of title resultant from the title examination First American Title conducted prior to issuing the loan policy. But bear in mind: title companies are not infallible; they sometimes make mistakes. And if First American Title made a mistake, the IRA would be left to suffer the loss of a title defect on its own, without insurance.

Consider this, alternative hypothetical:

1. The IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. The IRA pays for the property in cash; there is no financing.

In this scenario, there is no financing. That means there is no lender to insist and require that the IRA obtain any kind of title insurance. In the absence of a requirement that the IRA obtain title insurance, the IRA might not obtain title insurance. If the IRA does not obtain title insurance, it assumes the risk that it may have acquired defective title; and the IRA would be left to suffer the loss of a title defect on its own.

Now in either of the two scenarios discussed herein above, the IRA could hire a company to perform a title search. In such a case, in the event the title search company performed a bad search, and the IRA suffered a loss due to a defective title, the IRA might have recourse against the search company.

If the IRA pursued a case against the search company, the IRA’s recourse would be limited by the terms of the contract between the IRA and the search company. It’s likely that the contract would limit warranties of the work performed by the search company. As such, the recourse would be not nearly what the IRA could hope to obtain in the form of benefits from a title insurance policy.

So, consider this hypothetical scenario (a variation of the first hypothetical):

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. A loan policy is obtained.
5. An owner’s policy is obtained as well.
6. Both the owner’s policy and the loan policy are obtained from a company such as First American Title.
7. The IRA pays for the title insurance.

In this scenario, the total cost for the two policies would be $600. That’s based on a $575 premium for the owner’s policy and a $25 premium for the loan policy.

Understand that the premium for a loan policy, alone, in the amount of $70,000 would be $402.50. And an owner’s policy, alone, in the amount of $100,000 would be $575. In this scenario, because both a loan policy and an owner’s policy are issued, the premium for the loan policy is reduced or discounted to $25. This is commonly referred to as a simultaneous issuance discount. In this scenario, the IRA obtains the title insurance required by its lender, NASB; NASB is satisfied. And, for just $25 more, the IRA obtains title insurance for itself as well; the IRA has piece of mind.

The loan policy will eventually cease to exist. The owner’s policy (the IRA’s policy), on the other hand, will last for so long as the IRA owns the property. If the policy issued by First American Title tracks the language of the policy promulgated by American Land Title Association or ALTA (and it likely would), coverage afforded under the policy (the Coverage Amount) would actually increase by 10% of the Policy Amount each year for the first five years following the policy date, up to 150% of the Policy Amount. Thus, the IRA has a title search and analysis and title insurance (essentially, a warranty by the title insurance company, First American Title, of its search and analysis). After considering the various scenarios presented herein above, it should be obvious that an IRA engaged in the purchase of real property should not forget the title insurance.

About the Author

Greg Fencik is an attorney licensed to practice law in Florida since 1992. He is admitted to practice before Florida state courts, the U.S. Supreme Court, the 11th US Circuit Court of Appeals, and the Federal District Courts for the Middle and Southern Districts of Florida. He is a certified circuit court mediator. He received his bachelor’s degree from the University of Pennsylvania. He received a juris doctorate degree from Tulane University. He engages in business law, business consultations, and real estate law, as well as handles financing placements and credit facilities. In addition, Greg teaches real estate law at the University of Central Florida. He may be reached by email here.

Disclaimer: Anything read in this article is not to be taken as legal advice. It is up to the reader to consult with their own local attorney for any and all legal questions. This article is for educational purposes only. NuView IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.

Author Notes

[1]  To get a better idea of what exactly title insurers do when it comes to the investigation of and assessment of title prior to providing a policy of title insurance (underwriting), consider Chicago Title Insurance Company’s 333 page Basic Underwriting Manual.

[2] Many title insurance companies offer online title insurance premium calculators. First American Title, which utilizes policies promulgated by the American Land Title Association (see ALTA.org), provides an online calculator here.

[3] Either the purchaser or the seller of real property may pay for title insurance; in general, it may be negotiated in the purchase agreement.