Title Claims: How Title Insurance Protects You

Unlike other traditional forms of insurance that protect you from unforeseen future accidents, sickness and natural disasters, title insurance protects an owner from potentially undiscovered issues when you buy land or a home. Title insurance potentially provides insurance coverage to protect you from financial loss related to a defect in the status of title to property.  If it is later discovered you do not own what you thought you bought or if someone else claims some interest in your property, then title insurance may make you whole. The title insurer may file a lawsuit on your behalf, take steps to remove the defect and/or pay you money for your losses associated with the title defect.

When you take out a purchase money mortgage to buy your home, typically two title policies are issued: (1) an Owner’s Policy which insures you as the owner of the property and (2) a Lender’s Policy[1] which insures your mortgagee against defects which affect its security interest in your property. Most lenders will not loan money on a property without obtaining title insurance, and you should always seek to obtain an Owner’s Policy for any real property that you purchase.  The potential losses you could face if one of the title issues discussed below should occur on your property far outweigh the cost of an Owner’s Policy.[2]

The most common title claims filed by insureds under Owner’s Policies are:

• Property Boundary Disputes – This issue involves two adjacent property owners making a claim on the same land.  Sometimes this issue arises when a prior owner subdivided a lot or due to an error in the original legal descriptions to the properties.  It could also be a situation where a neighbor put up a fence on your land.  The title company may attempt to acquire the disputed property on your behalf, pay you the value of the property lost[3] or pay you for the diminution in value of your property.
• Easements/Liens/Interests in Land – All interests in your property should be recorded in the public records in order to advise all potential buyers of the interest.  A title search is typically performed to identify all of these interests prior to your purchase of the property.  The title policy issued when you buy the property should reflect any and all interests in your property.For example, many property owners have public utility easements and Declarations of Covenants and Restrictions for the Homeowners’/Condominium Association, which are third party interests in your property that should appear as exceptions in your title policy.  You may also find that someone claims to have the right to drive over or through some portion of your property to access their property, a roadway, or some other point of interest.  This type of interest is referred to as an “easement” or “right-of-way.”If you discover that a third party (i.e. the city, the county, the cable company) has an interest in your property, like an easement or right-of-way, the first thing you should do is review the exceptions to your title policy to determine if the interest was listed as an exception to coverage in Schedule B of your title policy.  If the interest is not listed as an exception to coverage, you may have a title claim.To resolve title claims relating to previously undiscovered interests in your property, the title company may attempt to eliminate the third party’s interest in the property in order to “cure” the problem with your title.  The title company may also be responsible for damages for the loss in value to your property as a result of the third party interest if the interest cannot be eliminated.  Any previously undiscovered interest in your property is typically referred to as a title defect.
• Liens – When work is done on real property, lien rights in the property arise to ensure that the contractor, subcontractor, or materialman receive prompt payment for their services. Lien rights in favor of cities and counties also arise for code violations and failure to pay public utilities.  In preparation for closing and issuing a title policy, the title company searches the public records looking for these lien interests.  Typically, the seller will work to settle or otherwise resolve these types of liens in advance of closing.If, after closing, you discover a lien on your property that pre-dated your ownership of the property and that does not appear as an exception in Schedule B of your title policy, your title company may be liable and a title claim should be filed.  The title company will investigate the lien to determine whether the lien was paid by the closing agent, but a Release of Lien was never recorded, or if the lien is unenforceable for some other reason.  Theoretically, if you have a valid title claim,[4] the title company will take any necessary steps, including paying off the lien, to eliminate the lien affecting title.
• Defects in Chain of Title – Although less common than the title claims previously discussed, the title policy also insures against problems with the chain of title. For instance, the prior owner of the property appears and claims that your deed to the property is a forgery or was obtained under false pretenses by the realtor. The title insurance policy promises to insure you against the title to the property being vested differently than you are expecting.  If the title to the property never passed to you as a result of a third party’s fraudulent acts, the failure of a closing agent or due to some other defect in the mechanics of the sale, then the title policy may protect you from suffering damages or the loss of the property due to no fault of your own.

This is by no means an exhaustive list of the types of title claims that may be submitted to a title insurer.  Most claims, however, do fall within these general categories.  If you are unsure whether you have a title claim, consult an attorney.  An attorney will be able to review your title policy and advise you on the best course of action to pursue.

[1] Claims filed pursuant to Lender’s Policies of title insurance generally relate to the priority of the lender’s mortgage on the property.

[2] If cost becomes an issue, consider asking the seller to pay for the Owner’s Policy when you are negotiating for the purchase of your property.

[3] The measure of damages is case specific.  For example, if the property that you lose as a result of the boundary dispute is a vacant strip of land, the value of your loss will be less than if the property you lose has your driveway and septic tank on it.  In the second scenario, your damages may also include the cost to relocate the septic system and re-pour the driveway.

[4] In the event that you had knowledge of a title defect in advance of purchasing the property, the title company may deny coverage based upon your agreement to purchase the property with the title defect in place.  Further, it is important to note that most title policies have limitations on how long you can wait once a defect is discovered before a title claim is filed.  If you wait too long, the title company may deny coverage based upon an unreasonable delay in filing the claim.

To read more on title claims see Title Claims – How to File a Title Claim