Title Insurance Keeps Nasty Surprises at Bay

You found your dream home. It meant forgoing vacations, nights on the town and a new car, but you managed to finally come up with the down payment and a mortgage loan.

Before signing on the various dotted lines, you scan the list of closing costs and notice a charge for title insurance. In fact, after points and prepaid mortgage interest, title insurance is your largest closing expense.

Home buyers may grumble about buying yet another insurance policy, but without title insurance, they run the risk of having to pay past-due bills or taxes left behind by the previous owner or even face the possibility of losing their new home.

I recently handled a case where a young couple moved into their home, only to find a $5,000-property tax bill was left unpaid by the seller. Since the home buyers had title insurance, their insurer paid the taxes. My job was to sue the seller for reimbursement for the title insurance company.

When property changes hands, all encumbrances not paid through escrow are transferred to the new owner. If the buyers hadn’t purchased title insurance, they would have been obligated to pay the $5,000-tax bill.

This is where title insurance is invaluable. Title insurance generally indemnifies the purchaser of the policy that a property’s title is free and clear of liens or encumbrances except for stated exceptions and exclusions.

If an encumbrance later appears, as in the above example, the insurance company is required to either eliminate the encumbrance or pay for damages. Without title insurance, home buyers are on their own.

Although California law does not require home buyers to purchase title insurance, the premiums are minimal (about 10% of closing costs) compared to the large monetary investment in the property.

Also, lenders do not normally provide funding unless title insurance is purchased. The one-time premium not only includes a title check, but it protects you from unknown claims for as long as you own the property.

About 125 title insurance companies are members of the California Land Title Assn. Of these, about 40 do business in Southern California.

Although most insurers offer similar coverage, the cost of title insurance can vary. Rates are filed with the state Department of Insurance and some are priced more competitively than others.

By shopping around, a home buyer can save several hundred dollars in premium costs for the same dollar amount of coverage.

If your new home has changed hands within two years before your purchase, ask for the insurer’s “short-term rate.” Since the title-searching process will not require as much time or leg work, these rates can be less.

Who chooses your title insurance company?

Most often, your real estate agent. Don’t feel obligated to use his or her recommendation. Remember, your title insurance is in effect for as long as you own your home, while your relationship with your realtor is usually over soon after the moving van leaves.

Chances are, you will never need an insurer’s legal assistance over a disputed claim or unexpected lien, but you’ll want to select an insurer with a proven track record, a reputation for service and one that offers prompt handling of claims if they do arise.

To help you choose a good insurer, ask your real estate agent and local mortgage companies for the names of title insurers they regularly use. Then do some investigating on your own.

To determine an insurer’s financial stability, request fiscal statements that show levels of monetary reserves. Also, contact the state Department of Insurance in Sacramento, (800) 233-9045, to find out if the insurance company is licensed. And call the California Land Title Assn., (916) 444-2647, to learn if the insurer is an association member.

Unlike casualty insurers, which assume risk when issuing policies, title insurers devote most of their efforts, and most of your premium payment, to researching a title--to eliminate risk--before issuing the policy.

A title search can find:

--Someone else, besides the seller, laying claim to the property.

--A third party’s lien on the property to collect payment of a debt.

--A judgment against the seller or a prior owner.

--An easement running through the lot that the seller failed to mention.

--Hundreds or even thousands of dollars of unpaid property taxes or liens.

Title insurers have “title plants” containing millions of public documents. The insurance company’s staff searches these records for “red flags.” Title insurers normally issue a standard policy that “. . . fundamentally protects only against defects in the title, or encumbrances on the property which are disclosed by the ‘public records.’ ”

These records can include tax or assessment notices, easements and encroachment records and court judgments.

After researching the property, the title insurer provides a preliminary report (usually paid for by the seller) listing any liens or encumbrances. The buyers’ real estate agent then notifies the buyers of the report’s findings. Most titles come up clean, but if a troubling lien appears, the buyers normally have three options:

--Buy the property knowing a lien exists, and assume the obligation and risks of the lien.

--Negotiate with the seller and his or her real estate agent to clear the lien from the title.

--Cancel the transaction. Buyers can legally back out of a deal if the seller fails to disclose all liens against the property.

If a lien clouds the title and the buyers still want to purchase the home, the title company will usually issue a policy but will not agree to insure the detected lien.

Once the preliminary report is accepted by the buyer, the insurer runs one more check on the day escrow closes just in case other liens have appeared since the preliminary report was completed. If everything is in order, a title insurance policy is issued.

Insurers review thousands of documents daily for Southern California property transactions. No system is infallible and human and computer error occasionally occur. As a piece of property is bought and resold, its lineage grows and chances for error or omissions increase.

When an encumbrance slips through the review process and comes to light only after you have taken title to the property, your title insurance premium protects your interests up to the maximum of the face value of the policy (usually the mortgage amount).

As the insured, you must notify the insurance company immediately upon learning of a claim against your property, or else under law, the insurer may not have to act.

Once notified, the title insurer will determine if the claim is legitimate. If it is, the insurer will then pay off the claim, compensate the homeowners, or take the issue to court if there is a valid reason for objecting to the claim.

Occasionally, an undetected claim on a property will affect the new owners.

For example, upon submitting plans for a family room addition, the new owners are told an easement runs through the proposed construction site. In these cases, the title insurer may be required to financially compensate the owners against any resulting losses or hardship up to the total amount of the title insurance purchased.

By transferring their property to new owners, some sellers believe they are no longer responsible for any undetected liens associated with their former property. This is not necessarily so.

Although the title insurer may have to make good on the claims or remove the lien to satisfy its contractual obligation to the home buyers, the insurer has the legal right to seek out the seller and obtain reimbursement.

Naturally, as new homeowners, you want to be assured that your home’s plumbing and heating work and the roof doesn’t leak, but these assurances are of little value if you do not also have the security of knowing your new home is free of legal encumbrances. Title insurance gives you that security.