Title Insurance Basics

Introduction

Title insurance insures risks associated with the transfer of real property. Imagine buying a home only to learn that somehow you don’t own the property. This occurrence can happen and, although unlikely, does happen . . . sometimes. Title insurance covers specific risks to title, ultimately making market-clearing values more predictable and stable.

The standard title insurance form used in whole or part by industry participants is the 2006 Owner’s Policy of Title Insurance produced by the American Land Title Association. For the rest of this article, this form will be referenced for edification and convenience.

The specific risks covered vary depending on the title company, location of the parcel, and type (or level) of coverage. Title policies will never cover every conceivable risk. However, some of the common risks covered include:

  1. Incorrect legal descriptions of property;
  2. Forgery or impersonation on recorded documents;
  3. Lack of competency, capacity, or legal authority of a party;
  4. Improperly recorded deeds; and
  5. Lack of a right of access.

Different levels of coverage are available, Standard versus Extended for example, with less comprehensive coverage costing less and more comprehensive coverage costing more.

Title Insurance Exclusions

Title insurance Exclusions are risks lying outside the scope of insurance coverage unrelated to the specificities of the parcel. Exclusions are defined as matters unrelated to matters of title. Exclusions are called out in a title insurance policy as a matter of clarification. Exclusions are not strictly speaking matters of title, but matters related to use of the parcel, use being a different matter than title to the property. Exclusions are marked “Exclusions from Coverage” and follow the “Covered Risks” section of the 2006 ALTA Owner’s Policy.

Broadly, Exclusions fall into two categories:

  1. Government regulations affecting the use of the parcel, including but not limited to zoning, building code, environmental, subdivision, and existing improvements;
  2. “Rights” by eminent domain.

Title Insurance Exceptions

Title insurance exceptions are risks that lie outside the scope of insurance coverage, risks related to the parcel. Exceptions are found in “Schedule B” of the 2006 ALTA Owner’s Policy following “Schedule A.” Exceptions are of two types: 1) Standard and 2) Special.

Standard Exceptions

Standard Exceptions are defined as matters unrelated to matters of title. Standard Exceptions are called out in a title insurance policy as a matter of clarification. Standard exceptions are not strictly speaking matters of title, but matters related to use of the parcel, use being a different matter than title to the property. The industry has found it useful to make clear what otherwise can be a confusing and contested area.

Broadly, Standard Exceptions may include:

  1. Parties in possession;
  2. Accurate survey or inspection;
  3. Adverse possession or prescriptive easements;
  4. Easements not shown by public record;
  5. Construction liens;
  6. Taxes.

The difference between Standard and Extended title insurance coverage is most often the difference between a policy that does not cover Standard Exceptions and that which does cover them.

Special Exceptions

Special Exceptions are found in Schedule B of the 2006 ALTA Owner’s Policy, most times in Section II, and often are referred to colloquially as Section B II exceptions. The Special Exceptions section lists public-record documents representing uninsured risks to title. The Special Exceptions represent the greatest risks when buying or selling property because they can be so diverse, unexpected, contrary to expectations, and ultimately expensive when not accounted for. For more information, see our article, Title Insurance Special Exceptions.

What is a Title Insurance Endorsement?

The title insurance endorsement alters the coverage provided by the title policy. Endorsements supplement the primary title insurance policy, providing coverage to the insured for specific issues not addressed in the primary policy.

The title insurer may issue an endorsement if there are special circumstances in the underlying real estate deal that should be accounted for. The list of possible endorsements goes beyond the scope of this article but some more common endorsements include:

  1. Endorsements for condominiums
  2. Planned unit developments
  3. Zoning endorsements
  4. Access endorsements

An example is ALTA Endorsement 3.1-06 (Zoning-Completed Structure). With this endorsement, the title company insures against loss or damage if, at the date of the policy, the land is not classified as being in a certain zone, or certain uses of the land are not permitted under the land’s zoning.

Another example, ALTA Endorsement 17-06 (Access and Entry), states that the title company insures against loss or damage to the insured if, at the date of the policy, there is not actual vehicular and pedestrian access to the land from the street, road, or highway named in the endorsement. In other words, it insures against issues with access to the property, which can sometimes be problematic in rural areas.

More Information

The American Land Title Association, located in Washington, DC, is the industry trade association for the title industry, providing authoritative information and standardized forms used in whole or part by most industry participants. For more information, visit www.alta.org.

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