Q: I am buying a condominium unit in Northern Virginia from a developer. Settlement is scheduled for mid-June. The lender has given me a disclosure statement indicating that I will have to purchase title insurance. What is that all about and is this necessary?
A: Insurance of any kind, in my opinion, is the only legalized gambling this side of Atlantic City. Most insurance policies -- such as accident, life or even homeowner coverage -- protects the insured against loss from happenings that may take place in the future. Title insurance, on the other hand, protects the insured against loss from occurrences that have already taken place.
For example, if Mr. and Mrs. A sell their house to Mr. and Mrs. B who in turn convey to C, title should be held by C. However, if one of the deeds contained a forged signature, it is possible that the person whose name was forged might be able to claim a valid interest in the title of C.
Indeed, since there is no statute of limitations for fraud, it is possible that a long chain of heirs could also claim title by virtue of the forgery.
To protect against these matters -- called clouds on the chain of title -- one can purchase title insurance.
You should understand that there are two kinds of title insurance policies: owners and lenders. The lenders' policy (not mortgagee insurance) is generally required by most mortgage lenders. That policy -- which requires a one-time premium paid by the buyer -- will protect the lender in the event of any claim or cloud on the title. Needless to say, as your mortgage balance decreases (ever so slowly), the amount of your lenders' title insurance coverage also decreases.
To protect your equity in the property, you can purchase additional insurance coverage. This extra protection is callled an "owners' policy," and again only requires a one-time premium, usually paid at settlement.
Thus while you are usually required to purchase the lenders' coverage, the additional owners' policy is optional for you.
Should you purchase the extra coverage? To a large extent, such coverage is a form of "peace of mind." The chances of risk are quite small, but there have been problems.
You should recognize, however, that the protection afforded by title insurance is not all-inclusive. Insist that your title lawyer (or settlement officer) fully explain the coverage and the exclusions in the policy. Particular emphasis should be given to the so-called "schedule B" exemptions, which will exclude from coverage certain risks such as boundary disputes or violation of the zoning laws.
Also insist that you be given the pros and cons as to whether you should purchase the optional owners' insurance coverage. For example, if the seller has owned the property for many years, you may decide to self-insure above the amount of your loan. If you are obtaining a 100 percent loan and plan to sell the property within a few years, since your equity in the property may be small, you may want to ignore the additional owners' protection.
Here are some suggestions when considering title insurance:
If you purchase a condominium unit from the developer, the chance of risk can be spread throughout the building. Thus, the additional owners' coverage may be unnecessary, but only you can make this decision -- based on all the facts.
Insist that your title insurance coverage include an inflation-protection endorsement, which will increase the coverage of the policy as the value of your property increases.
Ask the title attorney for a copy of the title report. If there are any unusual items listed, do not leave the settlement table until you are completely satisfied. For example, the title report (often called a "binder") may contain a notation that a bay window is sitting on city or county property.
While this is common, you should insist that the title policy be amended to read: "This will not cause a forfeiture or reversion of title."