Title Insurance. What it is & Why you need it in Colorado!

You have a house under contract, now the title company you hired will provide you with title insurance.  Great!  Ah, what is title insurance?  Do I need to have it?  Who pays for it?  What does it cover?

Who Is Protected?

Title insurance is for the protection of three parties: the seller, the purchaser and the lender. By purchasing a policy for the benefit of the purchaser, the seller in effect transfers the risk of a defective title to the insurance company, at least to the extent of the policy limits. Of course, the title company does not insure the seller against any fraudulent acts by the seller, or against a misrepresentation or failure to reveal information the seller is obligated to reveal. The insurance also provides the purchaser with assurance that the title has been examined by professionals in the field and that the insurance issuer is willing to reimburse the purchaser if there is a title defect. Finally, the lender’s policy (which is separate from and in addition to the owner’s policy) assures the lender that the insurance company will either take action to cure any after-discovered title defects or will reimburse up to the limits of the policy–usually the outstanding loan balance.

What Is Covered?

1. Items of Record: The insurance policy covers various items that are of record and are indicated.
2. Other:
   1. The incapacity of the grantor
   2. Certain technical, minor, but not substantive defects in the execution formalities of the documents
   3. Fraudulently executed documents and forgeries
   4. Void judgments and court orders
   5. The bankruptcy of the grantor
   6. Confusion arising from identical names of different persons

The Standard Exceptions and Possible Remedies: There are several standard, preprinted areas that are not covered, and there are insurance and/or practical ways to resolve those concerns. They are:

1. Persons in possession: If someone other than the owner has actual possession of the property, the title policy does not insure against that person’s rights. The obvious solution: Inspect the property.
2. Easements not of record: The policy does not insure against an easement other than one acquired via a written, recorded document (see discussion of easements above). The solution: Again, inspect the property, but it is probably also wise to obtain a thorough survey that includes any recorded or apparent easement.
3. Encroachments and boundary conflicts: If there is a dispute as to a boundary, or if your neighbor’s garage extends across the property line, the title company wants no part of the dispute. The solution: Obtain a boundary survey based on the legal description and/or recorded plat of the property in question. It should reveal any problems of this sort. They may be simple enough to solve with quitclaim deeds. If not, it is better to know before the closing, while you still maintain some leverage.
4. Any shortage in area: If the actual land (for example, as fenced in by the current owner) contains less ground than in the legal description, the title company cannot solve the problem. The solution: Get that survey; inspect the property.
5. Known defects: If the seller, the purchaser or their agents (Realtor, attorneys and so on) are aware of a defect in title or boundary, the title company will not cover it. While the concealment may or may not rise to the level of fraud, the idea is that people cannot acquire insurance against a problem they do not reveal to the insurance carrier. This is similar to the “existing conditions” exclusion in a health insurance policy.
6. Post-closing problems: If a problem arises after the effective date of the commitment (such as the recording of a new lien or a mechanics’ lien), the title policy may not cover it. The solution: “Gap” coverage is the agreement by the title insurer to cover the period between the effective date of the commitment and the date the deed is recorded. If a title company handles the closing, it is required by state insurance regulation to provide this coverage. However, if a title company does not handle the closing, gap coverage must be requested and paid for by the purchaser.
7. Unrecorded mechanics’ liens: Because of the wording of the mechanics’ lien statute, it is possible for a lien to exist even though it has not been recorded. The solution: Inspect the property for recently completed work, check with any contractor of whom you are aware, obtain an affidavit from the seller, stating that no work has been done (or if it has, that it has been paid in full), obtain a lien release from any suspected lien claimant, or, if you are not aware of any liens or possible claims, save yourself some grief and require the seller to provide mechanics’ lien protection in the policy.

Supplementary Safeguards

1. CREC Contract paragraph 7 contains provisions that allow the parties to agree whether an abstract of title or title commitment will be provided, and if a commitment is provided, whether it will delete or insure over the standard exceptions listed in the foregoing section, as well as unpaid taxes, assessments and unredeemed tax sales prior to the year of closing. The applicability of this additional coverage is discussed above.
2. Endorsements: In addition to the foregoing, there are various endorsements available to insure concerns or other potential problems:
   1. Form 100: This endorsement is for the protection of the lender and removes the standard printed exceptions. It is typically the buyer’s expense.
   2. Form 130: Similar to Form 100, this endorsement deletes the mechanics’ lien (#4) and possessory (#1) exceptions and minimizes the easement (#2 and #3) exceptions. It doesn’t cost much, though the title company may require a survey, so it is wise to inquire in advance. The title company will require a lien affidavit from purchaser and seller.
   3. “Gap” coverage: As indicated above, this covers the date between the commitment or last endorsement date and the recording of the deed. The title company will usually require that the closing take place at their office, but it will probably be there anyway, and the cost is well worth it given the risks.
   4. Extended coverage: This is a sort of “package” coverage that provides the same coverage as Form 130 and gap protection, as well as some additional risks, which vary from company to company.

Special Assessments/Special Taxing Districts: Special assessments by special assessment districts are almost never covered. The county treasurer may have some record of these, and they may appear on the tax certificate. If the property is included in a special assessment district, the best practice is to obtain a written statement from each district specifying the outstanding assessments, if any, relative to your property.

Comments:

It is important to remember that endorsements do not remove the problem; they merely insure over the concern. For example, if the garage encroaches onto the neighbor’s property or the fence is built ten feet inside the actual property line, the problem still exists. The endorsement merely transfers the economic risk of the problem to the insurance company, to the extent the policy has assumed that risk. In platted subdivisions, this is usually not a huge concern. However, when dealing with larger tracts or with property that is to be redeveloped, it may make more sense to attempt to solve the problem prior to closing rather than fight a battle later.

As a buyer you should discuss the availability and cost of the various insurance options with your realtor prior to execution of the contract. You should also discuss and commit to writing who is expected to pay for what so that there is no dispute or confusion at the closing.

Please feel free to email me with any questions: Mike@MikeMalvey.com.  I work with a great title company in Fort Collins so if I can’t answer your question, I will seek the answer from them.