Do Homeowners Really Need To Buy An Owner’s Policy Of Title Insurance?

Title insurance is an absolute necessity in every real estate conveyance transaction. The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement.

So, what Is Title Insurance?

Title insurance is a policy of insurance protecting homeowners and lenders from loss in the event that certain covered problems develop regarding the rights to ownership of the

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real estate purchased. While title examiners will search and certify the title to real estate before closing, there can be hidden title defects that even a careful title search will not reveal.  In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. If you have a mortage, a lender’s policy is required and will be a part of your closing costs. However, owner’s policies are optional and cost extra. The lender’s insurance protects the lender up to the amount of the mortgage, but it doesn’t protect your equity in the property. For that you need an owner’s title policy for the full value of the home.

What Does An Owner’s Policy Of Title Insurance Cover?

Owner’s Title Insurance will cover the cost to remove clouds on your title from such things as un-discharged mortgages, and the claims of unknown or missing heirs. An owner’s policy also covers these types of title defects: forged deeds or impersonations, incorrect legal or boundary descriptions, and recording errors. There is also extended coverage available for: building permit violations, adverse possession or prescriptive easements, building encroachments, incorrect surveys, pre-existing violations of subdivision, zoning laws, and restrictive covenants.

Is Title Insurance Worth The Cost?

Title insurance is based on the purchase price of your home.  The additional cost above the cost of the lender’s policy is relatively small. Typicaly, the premium is several hundred dollars. Title insurance is a good deal because it continues to provide coverage for as long as you or your heirs own the property. Passing up on an owner’s policy of title insurance because the risk of a title defect is minimal is a bad idea.  If you don’t believe me, consider this real title defect horror story.

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Imagine building your dream home, then finding out after closing that your builder built the house on the wrong lot!  Worse, the house is on a lot that the builder does not own, so he can’t simply swap lots with you.  This happened to a new client of mine from Tulsa.  A builder bought a lot from a developer of a sub-division, but mistakenly built a house on an adjacent lot. The builder then compounded his error by selling the house on the lot he did not own to my client, all the while representing that the house was on the lot the builder did own. My client moved in, but later discovered that her house is not on the lot to which she received title.  Instead, the house is on the adjacent lot that is still owned by the developer.  Now I have the job of trying to solve this problem.

To complicate matters, Oklahoma law (60 O.S. §334) provides: “When a person affixes his property to the land of another without an agreement permitting him to remove it, the thing affixed belongs to the owner of the land….”  Oklahoma case law is in accord. See, Mid-State Homes, Inc. v. Martin. It follows then that the developer may not be interested in simply trading his significantly improved lot for the vacant one he originally sold to the builder.  The title insurance company may well have to provide the funds to buy the improved lot from the developer, and thereby protect the interests of its insured.  If so, the title insurance policy would be well worth the cost.

At this point, my client does not have title to the house she paid for, and her lender’s home mortgage is only secured by the adjacent vacant lot. This kind of mess is the sort of fact pattern found on law school and state bar exams.  It is an interesting case for me, and I expect that I will have to sue the builder to recind the sale, and file a lis pendens against the developer’s improved lot.  Sometimes litigation is the best way to get all the interested parties to the table to obtain a just resolution of the matter.

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