An Insurance Offer You Shouldn't Refuse

By Elizabeth Razzi
Sunday, September 2, 2007

Title insurance. I'll bet you think of it every night as your head hits the pillow: "At least we're covered by title insurance."

Okay, probably not. In truth, not only is title insurance the least-thought-about form of insurance, but the whole process of insuring title, guaranteeing your clear-cut ownership of the land, is odd.

It's logical enough that you have to pay a title company to research public land records and verify that the seller of a property actually holds a clear title that can be sold to you. But then the same company offers to sell you an insurance policy that pays off if they missed something. Then your lender demands that you cough up the cash for one of these insurance policies -- just to cover the lender.

It sounds like an offer from the mob.

But you probably should say yes. When making a decision about any type of insurance, the guideline is that the more dire the financial consequence of a loss, the more you need the insurance. Health insurance is necessary because it covers cancer, not because it covers flu shots. Homeowner's insurance is necessary because it covers fires, not because it covers broken windows. And title insurance is necessary because it covers you if some long-forgotten ex-spouse of the seller comes forth claiming that someone forged her signature on the deed.

You might wonder why you would need coverage if your lender already has it. Wouldn't the lender fight any claims that come up to cloud the title? It's true, you could ride along on that protection, to a point. But remember that the lender's concern over your property extends only to the amount of money you owe that lender. As you pay off your mortgage, the amount of title insurance coverage under the lender's policy will decline. With an owner's policy, you're covered for the value of the property, and coverage endures as long as you own it.

Standard policies generally cover threats to the title that occur before you buy the property. Title insurers now are offering enhanced policies that cover homeowners for a number of threats to their title that could arise in the years after the purchase.

For example, enhanced policies would pay your legal bills or reimburse losses if someone were to forge your signature on a deed or illegitimately place a lien against your property; if you were forced to remove a fence because it was built on the wrong side of the property line; or if you found yourself with a clouded title because someone failed to record the release of an old lien when you refinanced a mortgage.

Mike McFarlane, a real estate lawyer who owns Highland Title and Escrow in Ashburn, reviewed the pricing offered by Stewart Title Guaranty. On a Virginia home bought with a $500,000 mortgage, for example, the mandatory title insurance covering the lender would cost about $1,250. Adding a standard policy covering the owner would cost about $550, raising your total to $1,800. (In a July column, I mistakenly said adding owner's coverage would double the price. In fact, the extra cost for adding standard owner's coverage amounts to about $1 per $1,000 of home value, McFarlane said.)

Choosing enhanced coverage costs 20 to 25 percent more than standard owner's coverage, so that would bump up your cost by an additional $100 to $125.

Extra coverage is nice, but if you've been scrimping for a down payment, that extra hundred bucks (or more, on a more expensive home) might be better kept in your pocket than spent on the deluxe version of optional insurance. When you ask for price quotes from settlement agents or title companies, ask whether the premium is for a standard or enhanced policy. Some title agents make the enhanced coverage their default, and others assume you will want a standard policy. (You can, of course, decline the owner's policy altogether, although I think it's prudent to take at least some coverage.)

"I am not the strongest fan of enhanced title insurance," said McFarlane, who earns a commission selling it. "It is not a bad thing to have, but I think people should be able to do a cost-benefit analysis," he added.

For example, a community governed by a strong homeowners association will restrict the construction of fences and sheds, so owners would be unlikely to experience some of the property-line issues that would be covered by an enhanced policy. Owners of a condominium apartment also might have less use for the extra coverage, he said.

That's not to say it's worthless. "An older house might have issues that you want to protect with enhanced coverage," McFarlane said.

Whenever you buy a home or refinance a mortgage, ask for a discounted "reissue rate" on the new policy. That's long been standard advice for refinances. You don't need a new owner's policy if you bought one before; that old policy remains in effect. And the "reissue" discount could save about 30 percent on the lender's coverage, if the old policy was taken out less than 10 years ago.

McFarlane said the savings could even be available when you purchase a resale home, if the seller's policy is less than 10 years old. "That's somewhat a guarded secret among title insurance agents," he said. He recommends putting language into the home-purchase contract asking the sellers to give you a copy of their title insurance policy before settlement. You would need that to back up your request for a reissue rate. "It could save you hundreds of dollars," McFarlane said.

Your only risk is that the seller or the title insurance company says no.

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