In this article, I’m going to discuss some aspects about title insurance, what it covers, what it doesn’t cover, what it’s all about. Because in my law practice, I frequently see issues come about where people are asking me about it. Be it an easement, or restrictive covenant or some other type of document that affects the title to or the use of their property.
And the question tends to be well, doesn’t my title insurance cover this? Can’t I make a claim on the title company to get some reimbursement because my neighbor is claiming an easement? or my HOA is telling me I can’t do X, Y, or Z on the property. And the scope of title insurance coverage, in my experience, tends to be quite a bit different from what the popular perception of it might be.
So I want to go over, at least in general, is what a title insurance policy typically does and what people should be looking for when they get a title insurance policy in the course of buying a parcel of land.
To start with, if you want to know what title insurance is, it helps to understand more technically what title is. What is it when we talk about title to property? What are we really referring to? Title to land can be defined as the different legal rights that come under what we usually describe as ownership of land. For example, title can include the right to possess land, the right to build on land, the right to exclude others from land, and the right to sell land.
And so, title to land as defined can be affected in any number of ways. In many cases, title to land is affected by documents filed at the county recorder’s office, which is what we call it in the State of Idaho. Those documents can include such things as easement agreements, homeowners’ association covenants, shared well agreements, and more. I find that here in Kootenai County, Idaho, what we tend to encounter the most, as far as title issues that are found in the county recorder’s office are concerned, are easement documents, shared well documents, drainfield agreements, and other types of arrangements by which people come up with ways to provide private services to rural parcels that aren’t otherwise served by municipal water, sewer, and road services.
Of course, title to land can also be affected by the previous deeds where the land has been transferred from one person to another. The deeds to a property going back through the years are often called the chain of title. And we sometimes see deeds in the past affecting a parcel of land that include restrictions on how the property can be used. For example, there might be a deed at some point in the past to a property that says that this property is for residential use only. And then somebody later on down the line might have a question about how that affects whether they can rent the property as an Airbnb or VRBO. And in that circumstance, you might have a property that’s restricted in use based on something that’s in the historical title record. And so title insurance can cover some, but by no means all, potential risks when someone is buying a property.
We have a lot of experience reading title insurance policies, assisting people with claims, or assessing whether they have claims. When we deal with a title insurance policy, typically, what we’re looking at is a document that’s produced by the American Land Title Association or ALTA. They have a template Owner’s Policy of Title Insurance that was last revised back in 2006. And, so for about 15 years, the standard residential owners policy of title insurance has been based on this template that the American Land Title Association produced and last revised back in 2006.
Some of the covered risks that you would find in a standard ALTA owner’s policy would be a situation where someone buys property and it turns out that, because of a fraudulent conveyance or a mistaken conveyance at some point in the past, or perhaps somebody inadvertently conveyed property without knowing that they lacked legal authority to do so, perhaps a company or LLC deeded real property without having all the signatures of its managers or proper corporate approval to do so. And so title insurance can potentially step in and provide coverage for the situation where it turns out that the property is not actually owned by the person who got the title insurance policy, and who believed that after closing they would own the property in question.
There can also be covered under a title insurance policy unmarketable of title, which is a kind of nebulous definition in the law, but can be defined as essentially title that an ordinary, reasonable buyer in the marketplace would find to be free from defects. There’s also a covered risk in the standard ALTA owner’s policy for no right of access to and from the land. That’s something we do encounter where somebody buys a parcel of land, and for whatever reason, perhaps it wasn’t developed properly when a subdivision was created, or for some other reason, perhaps topographical issues and what have you. Turns out there’s not a legal right to have access to get to and from the property. And unless you can get an easement from a neighbor, the parcel can be landlocked. And in that situation, it’s possible that a title insurance policy would provide coverage. There are other covered risks within the scope of a traditional alter owner’s policy. But those are some of the ones that we would tend to see most frequently.
However, when it comes to any type of insurance policy, as people know, with health insurance and homeowner’s insurance and and other types of insurance they’ve encountered, there’s going to be a host of exclusions and exceptions to the scope of coverage under the policy. And so I want to talk about some of those because the exclusions and exceptions in a title insurance policy tend to be a bit more extensive than what people might think.
The standard ALTA owner’s title insurance policy that I mentioned has three categories of items that are outside the scope of coverage under the policy. Those are called exclusions, standard exceptions, and special exceptions. So, exclusions from coverage under the ALTA owner’s policy include zoning restrictions, municipal regulations, on the use of property. Examples are building codes, environmental protection laws, wetlands laws, those types of enactments by governments that restrict the use of how people can go about developing property, building on it, etc. Also eminent domain issues, condemnation of property, those issues are going to be within the exclusions on a standard ALTA title policy. Also excluded would be liens or title defects that have been created by the person who is insured under the policy. So if somebody takes out a mortgage on property simultaneously with getting a title policy, that’s not going to be covered by the title insurance. Also, bankruptcy issues, property taxes, to the extent they affect property title, outside the scope of coverage of the ALTA owner’s policy. And those are all under the exclusions.
So then I want to talk about standard exceptions. That’s the second category of items outside the scope of coverage. And those are regionally based. What I mean by that is, depending on where you are in the United States, the ALTA owner’s policy is going to have a different list of things that are excluded from the scope of coverage. So here in Idaho, and as well as other western states, one item that you’re going to almost always find in the standard exceptions will be water rights issues. You know, we’re in a pretty arid part of the country. And so water rights disputes, well rights disputes, issues of that nature tend to be litigated or a contested question more often here than they might be in Florida, for example. And so what you’ll find in the standard exceptions for an Idaho title insurance policy will be issues regarding water rights to the property, does the property have a water right, can you get water to the property? If not, then that most likely isn’t going to be something you can make a title insurance claim on, at least for an Idaho property under the standard owner’s policy. And also, you’ll see issues about CC&R’s, easements, taxes, and generalized exceptions to coverage in that category as well.
One thing I really want to mention here is the special exceptions because that is where we tend to focus the lion’s share of our work when we’re reviewing title to a property on behalf of a client who’s considering purchasing land. This is the third category of items outside the scope of coverage. We see that in the special exceptions, which is in Schedule B to the standard title policy, there’s a list of documents. And this list is different for each parcel. The standard exceptions will be the same for most parcels within a certain region but the special exceptions will be different for each parcel. Because each parcel will have a different set of documents that have been filed for record at the county recorder’s office affecting that land. And so that’s what I mentioned before where there’s a whole host of things that can be put into documents that go into the title record for a parcel: easement, agreements, restrictive covenants, shared well agreements, boundary line adjustments, records of survey that may show encroachments on the property, the list can go on and on.
And the problem that people can encounter when they’re buying property is that they might not know that these special exceptions even exist, or they might assume that documents in the recorder’s office are covered by title insurance, when, in fact, the exact opposite is true. If a document has been filed with the county recorder’s office, and if it’s included in the special exceptions to title coverage, then it’s not going to be covered. And if someone buys property with this document in the public record and it is listed on the special exceptions to title coverage, they’re going to be stuck with that. And we’ve seen any number of times in the law practice that somebody comes in with an easement over their property that was recorded. And they ask, Can’t my title insurance cover me because my neighbor is driving their truck across my property at all hours of the day. And this is not what I thought I was getting. And I should be entitled to some kind of reimbursement. We have to tell him, in that situation unfortunately, that the easement was there. If it was recorded in the past, if it was exempted from your title coverage, then there’s not going to be anything that we can do to help you out with that.
So what that means in practice is that anybody who’s buying real property in Idaho needs to be vigilant about reviewing and, in the best case scenario, having legal counsel review all of the documents listed as special exceptions to title insurance coverage under Schedule B. Read the title insurance policy disclosures to the fullest extent possible to find out what title issues there might be before you close, so you can avoid buying a property that turns out to not be what you hoped for or not what you expected because of legal risks that were shown in the public record, and could have been investigated before closing. And in fact, most Purchase and Sale agreements for real property will include a set time period in which the buyer can do that type of title review, sometimes we’ll see, five days, seven days, 10 days. And the purpose of that is to review what documents are in the special exceptions to title coverage, and how they would affect the buyer’s use of property.
Now, more people in this crazy market are choosing to forego title review and other contingencies before they close. And I understand why people would do that if they’re desperate enough to have property in Idaho and to leave wherever they might be currently living. But, you know, on balance, that’s not going to be the best route to take. Because as much as someone might want to buy a certain property now, they’re not gonna be happy six months later when it turns out there’s this easement or this encroachment or some other title issue that they can’t get coverage for. And that affects what they wanted to have the property for in the first place.
So, be aware of what title insurance does and what it doesn’t do. And the bottom line is that, before buying property, it’s always going to be a good idea to have legal counsel review the applicable title documents in the public recor, and make sure that you know exactly what’s there because, more likely than not, title insurance is not going to help you if you find something you don’t like in those documents.
At Timely Contract, we have local real estate attorneys who have experience throughout Idaho, including: Boise, Post Falls, Coeur d’Alene, Lewiston, Moscow, and Sandpoint.
We also have local real estate attorneys who have experience throughout Montana, including: Missoula, Billings, Bozeman, and Kalispell.