THE BLOG
11/19/2015 11:00 am ET Updated Nov 19, 2016

A Legal Introduction to Real Estate Title Insurance

A deed purports to transfer U.S. land ownership. However, possessing a deed is not conclusive proof of absolute or unquestionable ownership. There may be preexisting claims on the land, some of which, such as adverse possession, do not even appear in recorded public documents. In some nations other than the U.S., there is a land registration system in which government conclusively determines land title.

The Torrens Title System, one of registration providing that only encumbrances (restrictions or claims) listed on the title are valid, originated in Australia in the 1850s. For a variety of reasons it was not adopted in the U.S. In the U.S., government does not make a simple determination of land title ownership. The state-by-state certificate of title system for motor vehicles is the closest U.S. analogy to the Torrens system. In the U.S. real estate world, there are a large number of professionals who specialize in real estate and land title transactions. Land ownership disputes were common in the time of the U.S. frontier. Attorneys such as Andrew Jackson, to name a prominent example, were engaged in real estate title cases.

Both land owners and mortgage lenders wanted assurance that the land title was secure. From this need, title insurance developed owner's policies, lender's policies, and construction loan policies. Real estate title insurance essentially is an indemnity contract that pays the purchaser if specified title defects or other encumbrances occur. Significant use of title insurance in the U.S. dates from the 1870s. This comment provides a brief and incomplete educational overview of title insurance. Always consult a real estate attorney in specific situations.

Mortgage insurance, mortgage life insurance, and title insurance are different. Mortgage insurance compensates the lender for losses incurred if a borrowing buyer defaults on a mortgage loan. Mortgage insurance is typically required if the down payment is less than 20% of the purchase price. Mortgage life insurance repays the outstanding mortgage if the borrower dies. Many commentators suggest that traditional life insurance, with a fixed value, is superior to mortgage life insurance with a declining value equal to the unpaid mortgage debt. Title insurance is concerned with ownership issues and not a purchaser's mortgage repayment issues.

There are alternatives to title insurance. They all require a successful lawsuit to enforce one's rights or collect damages. The delay and expense of litigation is well known. The legal concept of "marketable title" involves a seller's ownership that a reasonably prudent purchaser would accept. This is not necessarily ownership that is free from all potential technical claims. The following methods of assuring marketable title are distinct from title insurance.

1. Warranty deeds contain implied guarantees but a purchaser would need to locate, sue, and hope to collect a judgment from the seller if a guarantee (covenant) were violated.

2. An "Abstract of Title" is a collection of all publicly recorded documents that impact a given land location, copied and collected in a booklet, "the Abstract." Still, one will need to be able to read and understand what these documents mean. This is a so-called "sit-down" title examination as one sits down and reads the booklet.

3. A "run sheet" is a list of references to the recorded documents. One must go to the public recording location (county courthouse or recorder's office) and read the documents directly from the records. This is a so-called a "stand-up" title examination.

4. A "Title Opinion" is an attorney's conclusions, typically in a letter or memorandum form, concerning the ownership of land, based upon items appearing in the public records. This approach is frequently utilized in oil and gas transactions and rural, non-residential, land sales. The title opinion will contain qualifications and statements of limitations.

The typical stated benefits of title insurance are an easier and greater possibility of recovery in the event of title problems and a faster, less expensive, and more standardized methodology. As properties have emerged from the housing collapse of a few years ago, a purchaser may need to exercise extra care in light of foreclosures and short sales. About four national title insurance companies issue over 80% of the title insurance policies. Title insurance companies may be regulated by a state agency and have standardized forms and rates; however, there is so much state-to-state variability that generalizations are difficult to make. The companies may also be subject to a state's consumer protection statutes and agencies.

There is a trade association for title insurance companies, the American Land Title Association (ALTA). The ALTA promulgates standardized forms but their legal standing varies from state to state. In some states a regulatory agency approves the forms that the title insurance company may utilize. These state approved forms may have variations in language from the ALTA forms. Some states are called "filed form states" where the ALTA forms are filed with the state prior to use but not otherwise approved or regulated. In a few states, only the title insurance company that filed a given form may use it. In some states the title insurance company may utilize whatever form it wishes, without state oversight. Consequently, there is no one standardized and uniform national title insurance form. Consult an experienced real estate attorney to determine the benefits and limitations of the title insurance policy in a given state.

A title insurance policy "jacket" contains the basic provisions, subject to attached schedules and endorsements. The term "jacket" dates from the times of a paper folder containing inserts, but today most policies are computer generated. Still, the older terminology lingers in many real estate markets.

The jacket consists of insuring clauses, exclusions from coverage, and conditions. Exclusions frequently include unpaid taxes and special assessments, adverse possession and other claims that a physical inspection of the property would reveal, unrecorded easements and government reservations such as water rights, and service, labor, equipment rental, or repair liens not shown in the public records.

Endorsements amend these provisions and are broadly divided into owner policy endorsements and loan policy endorsements. There are numerous endorsements and a comprehensive discussion is beyond the scope of this brief comment. Many of the endorsements require a survey, such as endorsements related to easements, area and boundaries, and the location of buildings and improvements. Other endorsements relate to zoning and subdivision creation issues and the existence of lease rights. Some relate to the lawfulness of loan interest provisions, taxes, mineral rights, and environmental matters. In a given state, not all title insurance companies may offer identical endorsements. The base premium rate and additional endorsement premiums vary from state to state. Again, an experienced real estate attorney will know the appropriate endorsements to request in a specific situation.

Especially in large commercial real estate land transactions, it may be appropriate to designate by name a trusted title insurance underwriter in the real estate sales contract. Likewise, in such contracts, one may designate by name a trusted, experienced, and skilled surveyor to conduct a new survey. An old survey may be flawed or not reflect changes that have occurred since it was conducted. Many problems may exist that only a skilled professional would appropriately investigate. For example, designated water drainage and flood zones may restrict construction and not be apparent from a causal examination of the land. There are a variety of provisions to include in commercial land transaction contracts and deeds that may differ from the typical residential transaction. Consult an experienced commercial real estate attorney.

This comment provides and brief and incomplete educational overview of a complex topic and is not intended to provide legal advice. Always consult an experienced real estate attorney in a specific situation.