Is Title Insurance Really Worth the Cost? – Part 2: The Gamble
Is title insurance really worth it? part 2 – you decide.
Brought to you by Old Republic National Title.
Would you ever think you could lose your home because another person legally has a right to it? That thought might never cross your mind, but perhaps it should.
According to a spokesman for the American Land Title Association, one of every three title searches reveals a problem affecting the title to a property. Most of the time, the problem can be fixed. But sometimes, no one is aware one exists until it’s too late. Hidden title defects can threaten property rights and create costly title disputes that leave homeowners unable to defend their interests without the security of an Owner’s Policy of Title Insurance.
The story below is the second in a series to illustrate how unsuspecting homeowners can be blindsided by title defects. (Click here to read the first story.) These stories are hypothetical, but the scenarios are real. Each story is based on common title defects that have prompted over 730,600 claims from policyholders across the industry to date.*
Betty Buyer purchased a home from Sammy Seller for $100,000. A recent widow with limited means, Betty used $50,000 of her life savings and borrowed $50,000 from a lender to purchase her new home. Betty’s lender required her to pay for a Loan Policy of Title Insurance (loan policy), and she decided not to purchase an Owner’s Policy of Title Insurance (owner’s policy) for herself. Three weeks after closing, as Betty was settling into her new home, she received disturbing news: the property was subject to a $20,000 judgment lien against her seller. Unbeknownst to Betty, a credit card company recently sued her seller. The credit card company obtained a judgment against Sammy that was recorded just prior to the deed that conveyed the property to Betty.
In a panic, Betty started calling everyone, including Sammy. Sammy answered his cell phone from a beach in Costa Rica. He told her the judgment lien was no longer his problem. Sammy hung up on Betty and never answered her calls again.
Since the judgment lien was recorded with the County Recorder’s office before the deed conveying ownership of the property to Betty, the property was subject to the judgment lien in favor of the credit card company. And because Sammy failed to pay the judgment, the credit card company could foreclose on Betty’s home to recover the $20,000 Sammy owed.
Unfortunately, Betty is not covered by her lender’s loan policy. In addition, that policy is limited to the $50,000 mortgage, while Betty bought the home for an additional $50,000 of her own money. If Betty had purchased an owner’s policy, she could have submitted a claim to her title insurance company. An owner’s policy covers judgment liens recorded before the policyholder’s deed, so the title insurance company would have to defend Betty’s interests if the credit card company attempted to foreclose on her property. More importantly, the title insurance company could have paid off the debt or settled with the lien holder to prevent Betty’s loss. However, since Betty declined an owner’s policy, she is not entitled to indemnification (compensation for a covered loss†) or legal representation from the underwriter. She will have to pay the $20,000 herself or risk foreclosure proceedings by the creditor and losing her home.
While the chances of encountering a title defect are low, the stakes can be high for those who do. In 2018, the title industry spent over $615 million* defending the property rights of its policyholders and compensating their losses due to covered title defects. The one-time premium you pay for owner’s title insurance is significantly less than what you could spend in legal fees to defend your interests, especially when there is a possibility you could lose your property.
Defining the Title Defect: Undiscovered Liens
A lien gives a person or organization a legal claim to someone else’s property until a financial obligation is satisfied. Most liens are part of an agreement to purchase real or personal property. They help consumers take out home and auto loans, but they also provide security to creditors in the event those debts are not repaid.
A lien also can be imposed because of legal action, including:
- Mechanic’s liens – may be a lien on the property where contractors performed work but did not get paid
- Judgment liens – can be levied against a property if someone wins a civil lawsuit against a homeowner who does not have the means to pay
- Tax liens – allow tax authorities to collect unpaid taxes from a delinquent taxpayer’s current or future assets
It is difficult to sell a property with a lien because most buyers do not want to pay off someone else’s debt. Usually, liens are removed when the borrower repays the debt or settles with the lien holder, although some liens can expire or be invalidated through a lawsuit.
Liens are public documents that are filed and recorded with local government offices to inform others about existing debts. They should be discoverable in real property records, but sometimes don’t appear due to:
- Improper filing or execution of documents
- Clerical errors
- Expiration of a lien (that can be extended)
- Recording of a lien after a title search is conducted
How Owner’s Title Insurance Protects You
When you take out a home loan, your lender requires you to pay for lender’s title insurance because it protects their investment. It does not protect yours. Only the purchase of an Owner’s Policy of Title Insurance ensures that your property rights stay protected.
Owner’s title insurance is a one-time cost, paid at closing, that is based on the purchase price of your home. It’s usually less than your annual auto insurance premium, yet it provides coverage for as long as you and your heirs own the property.
Buying a home is the single largest investment most people ever make. It’s prudent to cut costs where you can but declining an Owner’s Policy of Title Insurance is a gamble that can have devastating consequences. Budgeting for that coverage may require some sacrifices in the short term, but the peace of mind you get in the long run is priceless.
* Based on combined Form 9 Annual Statements for all insurers within each family, as compiled by the American Land Title Association (ALTA) in the 2018 Title Insurance Industry Data Book.
† The covered risks are subject to the policy conditions, exclusions and exceptions. Old Republic Title strongly recommends that you obtain guidance and advice from qualified professionals, including attorneys specializing in title insurance, real property, and/or trusts to get more detailed, and current information as to any situation that might impact title to land.