Question: We purchased our home back in 1989. We have refinanced twice, and in neither case did we receive a new title insurance policy. Is a new policy necessary when one refinances? Also, in reading our policy, it appears that there are a large number of exclusions. Is it possible to obtain a new title policy from another company at this time?
Answer: Title insurance -- for a lot of homebuyers -- is a mystery. You go to settlement, and among the many items you have to pay is a large sum of money for Owners and Lenders Title Insurance. You pay it, primarily because the title attorney tells you that you will not get your loan unless the lender has adequate insurance. Several months later, your insurance policy is mailed to you by the settlement company. You tuck it away with the rest of your home-purchase documents, and then forget about it.
What exactly is title insurance and why is it necessary?
You bought your house back in 1989. How long before that did your seller own it? There is in real estate a concept called "chain of title." A sells to B, B to C, and so on until you are about to buy your house. You want to be assured that the "chain of title" is unbroken. For example, up until the 1990's, we had in the District of Columbia "dower rights." These came from old England, where a spouse could not sell his or her house without getting the approval of the other spouse. (Actually, in technical terms, this was known as "Dower and Curtesy"; Dower was to protect the wife and curtesy protected the husband).
When you bought your house, did both husband and wife sign the deed? If not, absent some legal explanation, the non-signer might have a claim against your house.
Land records are kept in the Office of the Recorder of Deeds. Nowadays, many such offices are computerized. But before the advent of computers -- indeed even before typewriters were invented -- people were buying a selling houses, and deeds were used to convey the property. It is fascinating to go back in history and read some of the hand-written deeds, in archaic legal language.
And since human error is always a potential problem, there are occasions when there are "clerical errors" in legal descriptions. Your lot is number 0712, but it is recorded as 0721.
Additionally, where there is real estate, there will always be scoundrels. Forged deeds and phony notarizations are not uncommon, and these issues can and will cause defects -- clouds -- on the chain of title.
Title Insurance can be your protection against these kinds of losses. More importantly, lenders will not make mortgage loans without obtaining this protection, which is called a "lender's title insurance policy."
It should be noted that unlike homeowners insurance, which protects you from events which may occur after the policy is issued, title insurance only protects against losses from matters which developed prior to the time you obtain the policy. However, once you have a title insurance policy, you and your heirs are covered so long as you have any interest or involvement in the property.
Should you buy the optional owner's title policy? That's a difficult question and the answer really depends on the facts of each transaction. Clearly, if your seller has owned the property for many years, the likelihood of a problem arising is slim. Some consumers are risk-takers; others are not. The cost of the additional owner's insurance is relatively small, so you may opt to take out the full policy for better coverage. The fact that you had to purchase lender's policy does not in any way protect you -- or give you coverage.
I often make the analogy to vacation insurance; it's a lot of money, but if you cannot take that trip, its nice to get a full refund.
You asked if you need to obtain owner's title insurance when you refinanced. The answer is no. As discussed above, once you have an owner's policy, you are covered forever. Your new lender will want lender's coverage, but you do not have to pay for the extra coverage. And don't let the settlement company or attorney convince you otherwise.
You also ask if you can obtain a new policy from another company at this time? I don't see why not, but question the need. If you want to get a new policy, you will have to have your title searched, and will have to pay a lot of up front costs -- in addition to the cost of a brand new policy.
You are correct in that there are a number of exclusions in your policy, such as:
- matters which are disclosed on the public record; this raises questions, however, as to what is a "public record." That's a topic for another column.
- real estate taxes which are not yet due;
- matters which are not shown (recorded) among the public records, but are known to the person obtaining the title insurance policy.
Recently, the Government Accounting Office (GAO) issued a report entitled, "Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers." One of the significant recommendations in the report was:
GAO recommends that HUD and state insurance regulators take actions to improve consumers' ability to comparison shop for title insurance and strengthen the regulation and oversight of the title insurance market.
The full report can be found on the GAO website .
The American Land Title Association -- the trade association for the title insurance industry -- responded as follows:
ALTA supports the GAO's conclusions, recognizes that improvements could be made to the industry, and is committed to partnering with various regulatory and governmental agencies to do whatever it takes to better protect consumers.
Only time will tell.