The purchase of real property is one of the more expensive investments that our clients make. At the time of closing, nondiscretionary closing expenses such as transfer taxes, bank fees, mortgage title insurance and appraisal costs significantly add to the upfront costs to be paid by the purchaser at closing. One discretionary expense is the purchase of an owner’s title insurance policy. The owner’s title policy is a one-time charge that is not required as a condition of loan closing by any lender financing the transaction.
Often clients will ask if it is really necessary to purchase an owner’s title insurance policy given that a title search of the property will be conducted prior to the closing. Our experience has been that it is always wise to purchase an owner’s title policy to protect your investment as there are numerous times when even a properly conducted title search will not uncover a problem that will likely lead to a claim against the property. In most instances, these claims are covered by an owner’s title policy. Coverage from suit in these claims can protect you as the owner against the reduction in value of the property due to an undisclosed encumbrance or costly legal expense in the defense of your property or enforcement of your property rights.
It has been my experience that title claims against real estate are so varied that it is impossible to anticipate in advance of purchase if a property may later be subject to a title claim. Bergeron Paradis & Fitzpatrick represents a leading title insurance company in Vermont. Three recent examples of actual title insurance claims that we have defended demonstrate the varied nature of real estate title claims.
The first of these claims involved a judgment creditor who attempted to foreclose a judgment lien filed in the land records against the property owner claiming the lien had priority over a later recorded first mortgage. The owner’s name was “Bayley” but the court, in issuing the judgment lien, spelled the owner’s name as “Bailey”. The error was not noticed and the judgment lien was recorded under the name “Bailey” in the land records. In conducting a title search, the title searcher did not discover the lien due to the different spelling. Recently, the Vermont Supreme Court upheld a lower court decision striking down the priority of the judgment lien over the priority of the bank mortgage, holding that a title searcher “should not be expected to do the work of poets, phonetic linguists, or multilingual specialists” as such a requirement would be an unfair burden. Lively v. Northfield Savings Bank, et al, No. 2007-165, October 5, 2007.
The second of these claims involved the foreclosure of an undischarged mortgage on the property of the owner. In 2004 the owner had purchased property for use as his primary residence. Prior to closing, a title search revealed the presence of a substantial first mortgage on the property. At the closing, the bank holding the existing mortgage erroneously advised that the payoff was only a few thousand dollars as the bank reported a payoff on the wrong loan of the record owner. This amount was paid and the remainder disbursed to the Seller of the property who retained the proceeds instead of paying off the actual mortgage loan balance. Three years later, the new owner of the property was sued for foreclosure by the bank on their priority first mortgage.
The third example involved an easement to use a common lakeshore lot in a development as access for swimming and boating purposes. The property owner’s deed specifically provided that the lot had the benefit of the easement over the lakeshore lot for access. The lakeshore lot was sold to a third party who immediately commenced construction on the lot, denying the lot owners with deeded access to the lot enjoyment of their rights.
In all these instances, the owners, at the time of closing, purchased an owner’s title insurance policy. In each instance, the title insurance company immediately stepped in to defend the claims of the owners at considerable expense. What is significant about these actual claims is that they are not claims that could have been avoided by conducting a title search on the property. In the first claim, considerable expense was incurred in defending the owner’s priority first mortgage against the judgment lien, with the case ultimately being appealed to the Vermont Supreme Court. In the second claim, the title company was required to pay off the previous first mortgage in order to protect the owners from foreclosure. In the third claim, the title company was required to defend the right of the property owner to enjoy the benefits of the deeded lakeshore easement for which an owner’s title policy had been secured.
When comparing the cost of title insurance to the cost of defending any of these claims, it is readily apparent that the protection offered by an owner’s title policy is a good investment.