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Is
Purchasing Title Insurance Obligatory?
It
is if you need a mortgage, because all mortgage lenders
require such protection for an amount equal to the loan. It
lasts until the loan is repaid. As with mortgage insurance,
it protects the lender but you pay the premium, which is a
single-payment made upfront.
Does
Title Insurance Do Anything For Me?
The
required insurance protects the lender up to the amount of
the mortgage, but it doesn’t protect your equity in the
property. For that you need an owner’s title policy for
the full value of the home. In many areas, sellers pay for
owner policies as part of their obligation to deliver good
title to the buyer. In other areas, borrowers must buy it as
an add-on to the lender policy. It is advisable to do this
because the additional cost above the cost of the lender
policy is relatively small.
Doesn't
the Lender Policy Indirectly Protect Me?
No,
title policies are indemnity policies, they protect against
loss, and a lender policy would only cover the lender's
loss. Of course, the fact that the insurer issued a policy
to the lender indicates that the title has been searched and
nothing amiss has been found, but no search is 100%
dependable. That is why an insurance policy is issued.
When
Does Title Insurance Protection Begin and End?
With
the exception noted later, title insurance only protects
against losses arising from events that occurred prior to
the date of the policy. Coverage ends on the day the policy
is issued and extends backward in time for an indefinite
period. This is in marked contrast to property or life
insurance, which protect against losses resulting from
events that occur after the policy is issued, for a
specified period into the future.
Why
Do I Need to Purchase a New Policy When I Refinance?
You
don’t need a new owner’s policy, but the lender will
require you to purchase a new lender policy. Even if you
refinance with the same lender, the existing lender’s
policy terminates when you pay off the mortgage.
Furthermore, the lender is concerned about title issues that
may have arisen since you purchased the property, such as
the lien mentioned in an earlier question. A new title
search will uncover the lien, and you will have to pay it
off as a condition for the refinance.
Insurers
generally offer discounts on policies taken out within short
periods after the preceding policy. In some cases, discounts
are available as far out as 6 years from the date of the
previous policy. Ask for it, it may not be offered if you
don't.
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For
How Long Is the Property Owner Purchasing Title Insurance
Covered?
Indefinitely.
The owner’s protection lasts as long as the owner or any
heirs have an interest in or any obligation with regard to
the property. When they sell, however, the lender will
require the purchaser to obtain a new policy. That protects
the lender against any liens or other claims against the
property that may have arisen since the date of the previous
policy.
For
example, if the contractor you failed to pay for remodeling
your kitchen places
a lien on your home, you are not protected by your title
policy; the lien was placed after the date of the policy.
You will probably be required to get the lien removed before
you can sell the property. But in the event the lien
hasn’t been removed and a search has failed to uncover it,
the new lender will be protected by a new policy.
Will
Title Insurance Protect Me Against False Claims That Arose
After I Purchased the Property?
The
standard policy does not, which is a weakness. Many events
beyond your control can reduce the value of your house after
you buy it. Identity theft can result in a new mortgage you
know nothing about. A neighbor could build on your land
without your knowledge, thereby adversely possessing and
possibly eventually taking your land. Or you may suddenly be
told that you must correct a zoning violation of the
previous owner.
To
deal with these issues, a new policy with expanded coverage
has been developed. I am told it is virtually standard in
California and is available in many other states, perhaps at
a small price increase. It is usually referred to as the
ALTA Homeowner’s Policy.
Does
Title Insurance Coverage Rise With Increases in the Value of
My Property?
No,
but coverage under the ALTA policy referred to above
increases by 10% a year for the first 5 years after
issuance, to 150% of the initial amount. You can buy
additional coverage as a rider to the policy.
If
your policy does not have such a rider and your property has
appreciated sharply in value, you may be able to purchase
additional coverage on the same policy by paying an
incremental fee. The fee should be modest because because no
new title search is involved. The coverage will only apply
to title defects that existed prior to the original date of
the policy. To extend the coverage to events that may have
clouded the title since the original policy, you would need
to take out a new policy with a new search and pay the full
rate.
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Does
the Fact That Title Insurance Companies Pay Out Very Little
in Claims Indicate That it Is Overpriced?
No,
it may be overpriced, but not for that reason. Because title
insurance protects against what may have happened in the
past, most of the expense incurred by title companies or
their agents is in loss reduction. They look to reduce
losses by finding and fixing defects before the policy is
issued, in much the same way as firms providing elevator or
boiler insurance. These types of insurance are very
different from life, property or mortgage insurance, which
protect against losses from future events over which the
insurers have no control.
If
a Borrower Does Shop For Title Insurance, Would it Pay?
Perhaps.
It is difficult to generalize because market conditions vary
state by state, and sometimes within states.
I
would certainly shop in states that do not regulate title
insurance rates: Alabama, District of Columbia, Georgia,
Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West
Virginia.
You
would be wasting your time shopping in Texas and New Mexico
because these state set the prices for all carriers. Florida
also sets title insurance premiums but not other
title-related charges, which can vary.
In
the remaining states, the situation is murky and it may or
may not pay to shop. Insurance premiums are the same for all
carriers in “rating bureau states”: Pennsylvania, New
York, New Jersey, Ohio and Delaware. These states authorize
title insurers to file for approval of a single rate
schedule for all carriers through a cooperative entity. Yet
in some there may be flexibility in title-related charges. More promising are “file and use” states – all those
not mentioned above -- which permit premiums to vary between
insurers.
It
is a good idea to ask an informed but disinterested local
whether it pays to shop in the area where the property is
located. Just keep in mind that those likely to be the best
informed are also likely to have an interest in directing
your business in the direction that is most advantageous to
them.
Are
Title Insurance Premiums Deductible?
Under
existing rules, they are not. If the tax code was logically
consistent, however, premiums paid by borrowers on lender
policies -- those that protect only the lender -- would be
deductible.
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Are
Title Insurance Premiums Fair to Low-Income Borrowers?
Probably
they are more than fair. Most title insurance costs arise in
preventing loss rather than paying claims, and prevention
costs are not much different for a small policy than for a
large one. Despite this, premiums are scaled to the amount
of the mortgage or the value of the property, which suggests
that smaller policies may be under-priced and larger
policies overpriced.
Does
Title Insurance Guarantee Me That I Will Be Able to Sell My
Property If An Unforeseen Claim Arises?
No.
Title insurance does not prevent loss of marketability due
to a title claim, any more than fire insurance prevents
fire. If a claim arises, you probably won’t be able to
sell your property until the claim is settled by the title
insurer. The interest of the owner and the insurer may clash
in such cases. The owner usually wants settlement
immediately, whereas the insurer wants to minimize the cost
of settlement, which may require time-consuming negotiations
with the claimant.
Why
Are There Such Large Variations in the Cost of Title
Insurance in Different Parts of the Country?
One
major reason is that the services covered by the title
insurance premium vary in different parts of the country. In
some areas, the premium covers not only protection against
loss but also the costs of search and examination, as well
as closing services. In other areas, the premium covers
protection only, and borrowers pay for the other related
services separately.
To
complicate it further, in some states the charges for
title-related services are paid to title insurance
companies, which perform the functions but charge separately
for them. In other states, borrowers may pay attorneys or
independent companies called abstractors or escrow
companies.
Of
course, what matters to the borrower is the sum total of all
title-related charges. These also differ from one area to
another in response to a variety of factors. The 50 states
have 50 different regulatory regimes, which affect charges.
So do local costs, competition in local markets, and
other factors. This is a largely unstudied segment of the
economy that would make a nice PhD dissertation for a
student in economics!
Does
a Borrower Have the Right to Purchase Title Insurance on
Their Own?
Yes,
although few exercise it. Most leave it up to one of the
professionals with whom they deal – real estate agent,
lender or attorney – to select the carrier. This means
that competition among title insurers is largely directed
toward these professionals who can direct business rather
than toward borrowers.
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