Q: We bought a condominium and were told that we had to purchase an owners' title insurance policy. Recently, we have been advised that we really did not have to buy that policy. Can you tell us our rights?
A: The question of title insurance is one that will be debated for many years to come. Generally speaking, when you buy a residential piece of property, the lawyer or title company conducting the settlement runs a title search, to determine who presently owns the property.
When a deed is signed transferring the property from the seller to the buyer, the attorney or the title company makes an assurance that the present seller has the legal capacity to transfer that property.
However, because our land laws are so archaic, and because there are so many possibilities of creating defects or encumbrances (clouds) on title, one cannot always be sure that a deed will really convey clear title.
For example: Mr. and Mrs. A sell to Mr. and Mrs. B, who subsequently convey to Mr. and Mrs. C. However, when Mr. and Mrs. B. owned the property, they got divorced, and Mr. B remar ried. The former Mrs. B retained ownership of half of the property, however, and thus when the new Mrs. B signed the deed, it really did not transfer all of the property to C.
The former Mrs. B -- and indeed her children and her grandchildren -- have an interest in the property, and are able to raise their claim at any time. Unfortunately, the statutes of limitations do not always operate to cut off these kinds of claims.
Thus, the title insurance industry was born. Basically, title insurance undertakes to guarantee to owners and lenders that if there is a title defect, the title company will, at their expense, defend the title in the courts, and if the entire title is lost, the insurance company will reimburse the parties to make them whole.
Oversimplified, there are two kinds of title insurance policies. A "lender's" title insurance policy protects the mortgage lender, and insures that the entire mortgage loan will be paid off, in the event of a significant title defect.
Most lenders insist that this type of title insurance (also known as mortgagee title insurance) be bought and paid for by the buyer at settlement.
The second form of title coverage is known as an "owner's" title policy. This is optional coverage, and no one -- seller or lender -- can require the buyer to purchase this policy. In fact, for all home purchases in Maryland, state law requires that buyers be given a form at settlement informing them of their right to buy or not to buy this additional owner's title insurance policy.
Should you purchase the additional policy? Let's look at the pros and the cons:
The cost is relatively small for the additional coverage and protection. Indeed, buyers should inquire about the so-called "re-issue rate," whereby the title insurance premium will be discounted if the seller has a fairly current owner's policy.
Additionally, in the event of a nuisance suit, or any other litigation involving the property, generally speaking the title company will pick up the legal costs for defending these suits.
And, finally -- and perhaps most importantly -- there is always the real possibility of a significant title defect. The title industry keeps reminding us that the Indians in Maine successfully found broken treaties giving them legitimate claim to substantial holdings in New England.
On the other hand, insurance is a form of legalized gambling. You pay your money and take your chances. If your seller has owned the property for a long time, you might find it unncessary to buy the insurance. The chances of risk are small generally, and they decrease significantly if your seller has owned the property for many years.
I wish I could categorically tell you that owners' title insurance is not necessary. Unfortunately, there remains a risk -- although it's quite small.
Thus, in the final analysis, the choice is yours. However, at settlement, you should insist that the attorney or the title company give you a full explanation as to the pros and cons of obtaining this optional policy.
And always remember: No one can force you to take this additional coverage.