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Title insurance demystified: do homeowners really need it?

Posted by Rona Fischman  August 12, 2009 02:43 PM

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Attorney Richard D. Vetstein who writes the Massachusetts Real Estate Law Blog is back to answer questions about one of the least understood aspects of a real estate transaction: title insurance.

He writes:

I always recommend that buyers purchase an owner’s policy of title insurance. The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement.

What Is Title Insurance?

Title insurance is policy of indemnity protecting homeowners and lenders from financial loss in the event that certain problems develop regarding the rights to ownership of property. While closing attorneys check each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by every public mortgage lender, but do not protect a property owner. Buyers must separately purchase an owner’s policy.

Title Defects: What Does An Owner’s Title Insurance Policy Cover?

I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had purchased title insurance which enabled the closing to go forward as scheduled, with the title company undertaking the obligation to discharge the liens and clear the title.

Other common title defects which are covered by standard owner’s title insurance include:

• Sudden appearance of unknown heirs claiming an interest in the property
• Forged deeds or impersonations
• Incorrect legal descriptions
• Improper recording of deeds

There is also a newer enhanced coverage policy available from First American Title and other companies which covers many situations excluded by standard policies such as:
• Building permit violations
• Adverse possession or prescriptive easements
• Building encroachments
• Incorrect surveys
• Pre-existing violations of subdivision, zoning laws, restrictive covenants.

Title insurance, however, does not guarantee a property has good, clear title, and is not a substitute for a competent title examination by an attorney. There are numerous exceptions to a standard owner’s policy (i.e., certain boundary encroachments) which should be discussed with your real estate attorney. Many of these exceptions are removed in the enhanced policy which I recommend obtaining.

How Much Does Title Insurance Cost?
Title insurance is a one-time premium paid at closing directly related to the value of your home. The cost today is roughly $3.65 per $1,000 in value. Thus, insuring a $500,000 home would cost a $1,825 one time premium. Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. As a former claims counsel for a national title company, I have seen countless title problems derail closings and drag on for years. If you don’t believe me, here are some title defect horror stories.

Full Disclosure: The Role Of The Closing Attorney

Most homebuyers don’t know that the closing attorney, as the agent of the title company, pockets a share (typically 70%) of the title insurance commissions paid at closing. While lender’s policies are required by lenders, closings attorneys do have a financial incentive to recommend owner’s policies for buyers. But not getting title insurance for this reason is like saying you shouldn’t buy life insurance because your financial advisor makes money off it. The risk of a title defect rendering your property unmarketable remains regardless of whether the closing attorney has a financial stake in the matter.

Ask any real estate professional. Get title insurance.

As a real estate professional, I do not give advice about title insurance. It is a legal issue that needs to be discussed with a lawyer. That's why I think it is a problem when the closing attorney (who gets a big commission) is also the buyer's attorney (who pays for the insurance.)

Do you think Title insurance is a good deal? Did you buy it when you bought your home? Do you think a new buyers should get the optional owner’s policy? The enhanced policy?


This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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36 comments so far...
  1. "[T]he closing attorney ... pockets a share (typically 70%) of the title insurance commissions paid at closing." How big is the commission? I assume this doesn't mean he pockets 70% of the premium, or title insurance would be the biggest scam going.

    I understand that serious title problems can arise, but how common are they? And does it cost the same regardless of the known history of the house (i.e. a recent foreclosure vs a house that has had owned by 3 owners in 60 years)? Those are the relevant questions when you're buying any kind of insurance: I've seen houses with terrible hurricane damage, but I wouldn't buy hurricane insurance for a house in Canada.

    Posted by James August 12, 09 05:40 PM
  1. New title insurance is also needed each time a home is refinanced. I can understand the Bank wanting a new title insurance policy to cover their loan, but why should the owner have to buy a new owner's policy for a refinance? Also, I had the experience when I refinanced our home of not being presented in advance with the additional cost of the owners title policy and not being presented in advance with the information about the enhanced coverage that is available, until we were signing the papers. I hope that advance disclosure of these options and the costs is now required as part of the loan process. What is do not know, and is not stated above, is whether the buyer can shop for the lowest priced policy, prior to closing and whether the price is negotiable.

    Posted by Bostonrunner August 12, 09 06:19 PM
  1. There are other sources for Title insurance rather than an attorney .I have always felt that it is a conflict of interest for an attorney to be collecting a commission on a policy that the attorney recommends.
    The title search , plot plan, and title insurance fees have always been grossly inflated. This is similar to the undercoating scam the car dealers used to use.

    Posted by REmaven August 12, 09 06:27 PM
  1. I recently purchased a home and passed on the owner's title insurance. I don't think blanket statements such as "always buy an owner's policy" or "never buy title insurance" can be made. Each buyer needs to make an informed decision about their risk tolerance and their estimate of the probability of a title defect (granted this takes some leg work). The fact that only 5% of the premiums collected by title insurance companies are paid out in claims, and that 70-90% of the premium (varies by state) is given to the closing attorney as commission, gives some idea about the overall frequency of major title defects. The Government Accountability Office produced a scathing report on the title insurance industry in 2007 that substantiates my argument. ...gao.gov/new.items/d07401.pdf

    Posted by Matt August 12, 09 08:01 PM
  1. REMaven: Conflict of interest to collect a commission on a policy an attorney recommends?

    First, attorneys don't generally collect a commission; agents do. Agents sell the policy. Buyers' attorneys recommend buyers get a policy. There is no fee-sharing between agents and attorneys.

    But if collecting a commission equals conflict of interest, then the entire real estate market would be one giant conflict -- after all, my real estate agent is recommending houses to me, and she collects a commission. Commission alone can't be the reason for rejecting something in real estate.

    Posted by jlen August 12, 09 08:40 PM
  1. I have title insurance on all my properties and have used it. The one time you need it, you really need it. I would absolutely, no question, have it on a property that was foreclosed on, no matter how long ago. Foreclosure deeds are often recorded incorrectly and pop up later when you try to sell.

    Posted by nf August 13, 09 12:24 AM
  1. jlen - Read the article for information on the attorneys commission on title insurance.(70%) .

    An attorney is a professional that gets paid for advice. If he or she benefit financially from the advice that you are paying for ,it is a conflict of interest.
    Real estate sales people are not a professional that you hire for advice. They are sales people that collect a commission when they make a sale. No sale ,no pay. You are not paying them , the seller is paying them.

    Posted by REmaven August 13, 09 12:52 AM
  1. I have owned a house in another state for nearly 20 years. It was my primary residence for most of that time, and when I moved to Boston I kept it as a rental property. About a year ago I applied for a HELOC on the property. The title search turned up multiple defects. Two of the previous owners had mortgages which were not properly cancelled, and the attorney that closed my original loan filed the paperwork incorrectly, listing the wrong lender so it was not cancelled when we refinanced (I don't know how we didn't discover that mistake before now). The banks which held the mortgages for the previous owners had long since merged with other banks, multiple times. And the attorney who represented me had died several years ago. So tracking down records was nearly impossible. I knew nothing of title insurance, but apparently I had only bought the required lender's policy and not an owners policy. The company told me that if I had an owners policy, they would have resolved the issue for me easily. As it turned out, I had to pay an attorney to work for months tracking down records to file cancellations. It was an expensive nightmare. I tell everyone now: BUY OWNER'S TITLE INSURANCE!

    Posted by David August 13, 09 08:03 AM
  1. Buy it! Several years ago, back taxes... to the tune of almost $400,000... were discovered to have been unpaid by the developer of our condo complex. All of us who had bought, sold or refinanced were issued liens against our property. Fortunately, most of us had title insurance which covered the payments. The few hundred dollars spent at closing saved me many several thousands more dollars that I would have had to pay otherwise.

    Posted by Rose August 13, 09 08:07 AM
  1. I understand that serious title problems can arise, but how common are they?

    As I mentioned before in a comment that either the servers or the moderators didn't see fit to post, Google "Ibanez." If your house was ever foreclosed upon, even if you personally bought it from a natural seller, you may have cause to worry.

    But if collecting a commission equals conflict of interest, then the entire real estate market would be one giant conflict -- after all, my real estate agent is recommending houses to me, and she collects a commission.

    Who says a real estate commission isn't a conflict? It's one of the most frequently-discussed topics on this blog.

    Posted by Marcus August 13, 09 08:32 AM
  1. REMaven is incorrect. In most cases the closing attorney (the one who represents the lender) is also the title agent and collects a 70-90% commission on the sale of a title insurance policy. There does not, though, represent a conflict of interest as long as the buyer is aware well before the closing that they have the right to purchase their own title insurance from whomever they wish. A potential for a conflict of interest exists when the buyer's attorney is also the closing (i.e., lender's) attorney. Every state's real estate board has a code of ethics to guide attorney's in avoiding this conflict.

    Posted by Matt August 13, 09 08:48 AM
  1. We bought title insurance from American Title Insurance and, when we had a claim, they weaseled out of paying it. Our attorney, who was also the attorney for the American Title Insurance, refused to help us - afterall who is the bigger client an individual homeowner or a cash cow non-paying insurance company? Shortly after our ordeal began, the Boston Globe ran a story about how title insurance companies rarely pay claims. I can't believe the Boston Globe didn't research it's own archives before posting this story. How on earth is the Globe considered the paper of record? Title Insurance is simply another Massachusetts scam where the Boston Globe is a willing participant.

    Posted by Massachusetts Corruption Runs Deep and Wide August 13, 09 08:49 AM
  1. Contrary attorneys do receive a commission on title insurance, up to 70% as agents of the title insurance company. Title insurance is not sold by the same insurance agent that sells annuities, car insurance, life or home owners. I am a Realtor and as stated by another above I am not in a position to hand out legal advice. I advise folks to speak to their attorney about title insurance but will explain what it is, how the cost is calculated and it's benefits. Bottom line: there is a risk involved by not having title insurance yet you are paying for a benefit that you will likely not utilize. Personally by purchasing title insurance my downside risk is a given: the cost of the policy. Whereas by not purchasing it my downside is unknown, could potentially cost much more and is completely out of my control. Regardless of who is receiving commission that just doesn't work for me.

    Posted by mp August 13, 09 10:11 AM
  1. You don't need to get a new owner's policy on a re-fi. The original owner's policy you received on the purchase stays in place. A new lender's policy will issue, however. (If you do a no closing cost loan, you shouldn't have to pay extra).

    You read that correctly, the attorney will take up to 70% of the entire premium of the title insurance policy. The attorney is the title agent in Mass.

    Title problems are relatively common in Mass. given the age of most titles, the complexity of real estate law, and basic human error at the registry of deeds and elsewhere.

    Posted by Richard D. Vetstein, Esq. August 13, 09 10:18 AM
  1. If you purchase title insurance when you purchase the house, then refinance, do you have to buy title insurance again?

    Posted by J August 13, 09 10:40 AM
  1. I bought title insurance on my home, and thank god I did. When I went to sell there was an issue with the title. I had no idea, and it didn't come up when I purchased the property. If I hadn't had the insurance, I would not have been able to close on sale. I know it may not seem necessary, but it saved me!

    Posted by Thankful... August 13, 09 11:15 AM
  1. To address the question raised by Bostonrunner, consumers in almost every state (including MA) have the opportunity to select their own title insurance and to shop around to reduce their closing costs; they should do their best to separate title insurance-related fees from settlement fees to be able to do an apples to apples comparison. In regard to title insurance fees, in addition to the title insurance premium for lender's and owner's policies, there may also be fees for title searches, title examinations and binders/commitments. Your goal as a consumer is to achieve complete transparency of all costs and to know what you are paying for in advance of your closing date.

    Consumers will typically find that premium costs (which include the commission referenced in the article) do not vary significantly between carriers, but there may be variability related to the associated fees. One way to achieve savings on the premium is to purchase your title insurance directly from the title insurance company; as an example, my company sells title insurance direct to consumers at a 35% discount, in addition to other normal discounts such as re-issue that the consumer might be entitled to.

    Posted by Fred Kauber - CIO, ENTITLE DIRECT August 13, 09 11:33 AM
  1. I am by no means an expert in this area... But the hefty “commission” (70%) paid to the closing attorney and the very low percentage of premiums paid out in claims (5%) does not necessarily imply a scam. Rather the “commission” can be thought of as an upfront payment to perform substantial due diligence on the chain of title. This extra effort naturally reduces the chance a problem will be discovered later, and that's why very few claims are paid.

    A similar example is boiler insurance. Most of the premiums paid for boiler insurance are never paid as claims. Instead, premiums mostly go toward routine inspection and maintenance which prevents accidents from happening in the first place. Far from being a scam, this is a very good thing because it means few boilers explode and kill people.

    An ounce of prevention is worth a pound of cure...

    Posted by Lance Stapleton August 13, 09 12:01 PM
  1. title insurance companies pay in the neighborhood of 5% of premiums settling and litigating claims. i'm not sure of the exact percentage but i would guess the majority of that 5% goes to avoiding responsibility and recouping costs. congress saw fit to investigate the industry b/c of such an enormous potential profit margin (although as stated above 50-70% of the premium goes to your attorney aka your title insurance salesman). it's a re attorney's bread and butter. i recall a forbes or money article about a year ago calling it one of the biggest scams in america. however, despite the collusive nature and the insurer's amazing efforts to skirt paying valid claims, it's a haircut that i'd recommend just b/c of the size of your exposure.

    regarding ibanez and various bankruptcy court decisions, the time scope of risk is relatively short. the problem arose in the last decade b/c of the increasing complexity of the chain of custody in the secondary market.

    with regards to the cost of clearing a cloud on improperly released liens, especially when the original lien holder was an institution, it is a signficantly easier process than stated above. any local re attorney worth their salt would hire a widely known specialist to the tune of $200ish to clean up that problem.

    Posted by still waiting August 13, 09 12:03 PM
  1. Nothing against Entitle Direct or any national provider but shop local first! Title Insurance is a local product with nothing more that a national standard. Nobody understands your county records and county treasurer better than your local title company. Please, shop around... But I would be willing to bet that your local title company's rates are better than a National Title Company's... I know mine are.

    Posted by Michael Rubin August 13, 09 12:05 PM
  1. Massachusetts needs to follow Iowa's lead and PROHIBIT TITLE INSURANCE. Iowans can get a "title guarantee" which is essentially title insurance. The difference is that it is dramatically less expensive than everywhere else in the country. The reason: no insurance agents and no huge premiums. Also, marketing is basically nonexistant. The only ones to complain in Iowa are the insurance agents and lawyers who aren't able to swipe the consumers' money.

    Posted by Matt August 13, 09 12:58 PM
  1. You need title insurance....When we bought a vacation home in 2003, we spent nearly $40,000 cleaning up title defects, etc. At closing we bought title insurance. Three months later we were brought into a lawsuit challenging our rights to some of the land. That suit was settled 4 months ago and our legal bill was over $600k. We paid $1700 for a title insurance policy and not one additional penny for our legal expenses.

    I hope someone made a commission as the policy saved our .....

    Posted by Brendan August 13, 09 01:31 PM
  1. Can you purchase Title Insurance after you close on a purchase?

    Posted by Michelle August 13, 09 02:23 PM
  1. Michelle... Absolutly. You can always purchase titie insurance. Assuming your property is insurable. Contact a local Title Insurance company listed on the American Land Title Insurance website.

    Posted by Michael Rubin August 13, 09 03:37 PM
  1. Lance Stapleton has the wrong idea. The lawyer is paid a separate fee to evaluate the title. The commissions don't ensure "due diligence" on the part of the lawyer-- they simply entice the lawyer to use that particular insurance carrier.

    Posted by Matt August 13, 09 04:41 PM
  1. what is the difference between title insurance and homestead insurance?

    Posted by Question August 13, 09 05:16 PM
  1. Why is it that all real estate agent compensation must be disclosed, but lawyers do not have to disclose what they make from these stealth commissions?

    Posted by Jack Dziadul August 13, 09 09:18 PM
  1. Question: Homestead is not "insurance." It is a statutory "estate" (ownership right) that provides some protection against a principal residence being seized by creditors and claimants, etc., to satisfy debts of the owner. If you go to any of the registry of deeds websites, you will find additional information about homestead and forms for claiming it. (It is not automatic, you need to claim it). Note that lenders will typically require you to subordinate any homestead rights you may have claimed to their mortgage.

    Title insurance, on the other hand, provides coverage against defects in the owner's chain of title. This may include prior undisclosed encumberances and liens, as well as adverse claims of ownership. Typically, it would not protect against subsequent attachments and liens of creditors in the way that homestead would.

    Posted by John O. August 14, 09 07:30 AM
  1. "I can understand the Bank wanting a new title insurance policy to cover their loan, but why should the owner have to buy a new owner's policy for a refinance?"

    You only pay for owner's title insurance ONCE, when you purchase your home. When you refinance, yes you must be always pay for a new loan policy of title insurance, but you will never have to pay for owner's insurance again for as long as you own that home. In addition, if you refinance, always ask if you are eligible for the "re-issue rate" on title insurance. If you have a prior loan policy on your home, you could qualify for this discounted rate.

    Posted by Beth August 14, 09 08:49 AM
  1. To Jack Dziadul,
    As a real estate paralegal who has put together Settlement Statements for the last 8 years, every HUD I've drafted clearly shows the breakdown of the title insurance and what the split is in terms of the commission, it shows the exact amount going to the attorney, and the exact amount going to the title insurance company. Many times a Borrower or Buyer will ask us for a draft HUD showing what our fees will be for their transaction, which of course we provide. Also to question 26, a Declaration of Homestead is a document that, when recorded at the Registry, protects your property from creditor's being able to attach liens to your property (excepted from this of course would be your mortgage lender and also your city/town tax collector.)

    Posted by Beth August 14, 09 08:58 AM
  1. When you get your draft HUD settlement statement, strike out the commissions paid on the title insurance and give it back to your attorney. If he/she complains, say, "Sorry, I'm not paying you 70% of the premium cost to do this; if you have any problem with it, our work here is done."

    It's a scam of epic proportions. Most buyers only find out the true cost of the premium and that it almost all goes to the lawyer, right before closing, so they don't want to raise any questions or complain. At that point, buyers just want to close!

    A ridiculous fee paid for no good reason except to pad the wallets of attorneys.

    Posted by John A Keith August 14, 09 05:05 PM
  1. I agree it's a massive scam. Most professionals...insurance agents, financial, advisors, etc. are required to pay for errors and ommssions coverage. So why would I pay an attorney for advice and then pay an additional charge to protect him if he makes a mistake? Buyers are paying a substantial title search FEE to have a professional search for the specific issues that title insurance covers.

    Posted by Ken August 15, 09 09:26 AM
  1. Ken: title insurance does not provide errors and omissions coverage to the attorney that issued the policy. When you purchase a title policy, you are purchasing peace of mind. In the event of an undisclosed defect, there is a substantial difference between having a being able to make a claim under your own title insurance policy and having a legal malpractice claim against an attorney. The legal malpractice claim can take years to reach a trial, and you will likely have to pay $20,000+ for an expert witness and other litigation costs along the way (not to mention sharing 1/3 of any recovery with your own attorney). The insurance claim should be resolved in a matter of months without these expenses.

    It may very well be that the issuing attorney gets a hefty commission, but considering the alternatives, it is still worthwhile in my view.

    Posted by John O. August 17, 09 04:39 PM
  1. Can a buyer then negotiate the cost of owners policy with the closing attorney? After all owners policy is optional, closing attorney is interested in selling it and buyer is interested in best price and has an option to by it after closing from 3rd party

    Posted by mzg August 18, 09 02:27 PM
  1. How common are the schedule B exceptions? We purchased owners insurance for a new construction and there are 26 exceptions for the lot, including terms and conditions of Developer Agreement, easements, etc.

    Posted by Ryan August 19, 09 01:29 AM
  1. Wow, what a bunch of mis-information.

    Yes, the commissions on Title Insurance are large as a percentage of the policy cost. Title companies also have a thing called a deductible which means that a large percentage of the claims are paid out of their pocket. In the case of an attorney, he would have significant expenses associated with the search of public records to come up with the chain of title which is required by law before you can issue a title policy. A typical search can represent anywhere from 3 to 20 hours of time to correctly search. This would come out of the attorney's pocket.

    Do you all realize that many retail stores have a gross margin of 50% to 70%? This is the same type of "Commission" with rarely any long term gurarentee attached to the product.

    One of the biggest benefits to a buyer is the title search itself. This is where the majority of title defects are discovered and corrected before the buyer proceeds with a purchase. An individual will happily spend $150 to have a mechanic inspect a $5,000 car prior to purchase. (With no resulting guranatee) Spending $1,500 for a gurantee (title insurance) on a $500,000 investment seems like a cheap investment, The ratio is 100 to 1.

    I am a licensed title insurance agent and would never, ever even consider purchasing property without obtaining a extended owner's policy. The possiblity of loss it too great.

    Posted by Howard August 31, 09 05:58 PM
 
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