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Know what your title insurance covers and doesn’t when buying a home

An oil leak near your property might not be covered by title insurance. (Dreamstime)

Q: I bought an investment property located on the edge of a river. Apparently, years ago, a nearby oil tank leaked. The tank was not disclosed in the purchase transaction. Can I file a claim against the title company for the errors and omissions defect?

A: We assume you are writing to us on this issue because you’ve already tried to go after the sellers and found out you couldn’t get anything from them or couldn’t find them. Once you buy a property, the sellers can go on their merry way and you might never see them again. Who is left? Your agent, the professional home inspector (if you had one and if he or she missed this during the inspection) and your title insurance company.

We always recommend that buyers obtain an owner’s title insurance policy (in addition to the lender’s policy your mortgage lender will require you have before closing on the property) when they buy a home or investment property. When you plunk down money for what is likely to be the single biggest investment of your life, we want to make sure that you are buying the property from the right person, that the seller is offering a property without any liens and that you understand what you are getting for your money.

Prior to closing on your purchase, you should have received a commitment for title insurance. That document would give you a snapshot of the status of the title to the property. You would see the mortgages affecting the property, any other liens, easements and other documents that have been recorded or filed against the title to that property. The commitment will also show the legal owner of the property.

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Your purchase-and-sale agreement will contain certain language that would require the seller to give you the title to the property you are buying in what we would call “clean” condition. This means that the seller would have to pay off any mortgages and liens that affect the property. You would also know whether the property has an easement that goes right through the property that would make the property unusable. With this information, you should have a better understanding of what you are buying.

For example, if you were buying a condominium, you’d expect to see documents relating to the creation of the condominium development as well as utility easements, but not a federal income-tax lien against your seller. If you were buying a single-family home, you might see utility easements, certain covenants relating to architectural review, ordinances that may specifically affect your home and others, perhaps some old deed restrictions relating to the prohibition on selling alcohol, a limitation on who you could sell the property to (leftovers from the pre-civil rights era), or the requirement that the property be maintained as a single-family home.

As you might gather, there are dozens of different types of documents that can get recorded against a parcel of land. The purpose of the commitment for title insurance is to give you an accurate picture of the status of the title as of a specific date. What title insurance does not do is protect you against the condition of the home, such as the discovery of termites, radon, mold or anything that happens to the title to the home after the closing date.

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If anything happens to the title of the property after closing relating to something that occurred prior to closing, the title insurance company may have the responsibility for that issue. For example, if the title company tells you the title is “clean” and has no issues, but after closing the widow of the prior owner to the current seller turns up stating she owns the property, then title insurance would help.

In your case, you're asking the title company to cover you for something unrelated to the title. An underground storage tank would not be something that the title company could have known was there unless there was a document recorded on title that indicated it was located on the property and the title company missed showing that on the commitment for title insurance.

You can talk to a real estate attorney further about your issue, but we suspect that you'll wind up discovering this issue is not covered by your title insurance policy. Sorry we don't have better news.

Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.

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