One of the most common questions we get from buyers is, “what is title insurance and why do I need it?” Although most homeowners in Massachusetts have title insurance, it remains a mystery to many people. Read on for clarity…and a real life scenario—one property owner had title insurance, one did not.
Title insurance protects owners and their lenders from financial loss resulting from a hidden defect in the title to a property. It involves a one-time payment (usually at the closing, but a policy can be purchased any time) and it covers homeowners for as long as they own the home. A title insurance policy is not a guarantee that the title to the particular property is good. Rather, it is an agreement by a title insurance company to defend the insured if there is a claim of a title defect covered by the title policy and/or to indemnify the insured for actual loss or damage sustained because of a covered title defect.
An owner’s policy protects you for the purchase price of your home plus legal costs if a title or ownership issue arises. Lenders require buyers to purchase a title insurance policy that protects the lender. Typically, a title insurance company will issue an owner’s and lender’s policy simultaneously for a discounted rate.
A Surveyor Made a Math Error…
Years ago, a property owner divided his land into multiple housing lots. The property owner hired a surveyor to prepare a plan that would create the new housing lots and the roads accessing those lots. Unfortunately, the surveyor made a math error when calculating the size of the development and the lots in it. As a result, three of the lots and a portion of the roadway were located on land owned by an abutter. By the time the error was discovered, two separate families had purchased those three separate building lots—but the developer had no right to sell those lots because he never owned the land. In short, neither of the two new “owners” had any rights to the lots they believed they had purchased.
As you can imagine, much angst ensued.
The fate of the two couples became tied to title insurance. One of the couples purchased title insurance when they supposedly purchased their building lot. Their attorney was able to show that the original plan was wrong and that the title defect was covered by title insurance. This couple received all of their purchase money back from the title insurer.
The second couple had purchased their property in cash and had not purchased title insurance. This couple was unable to recover their money from the developer or the surveyor, and thus they were out the money they had saved to build their retirement home. So…
Do I need title insurance?
Yes. In our experience, the time, money, and aggravation saved by purchasing a title insurance policy is worth vastly more than the one-time premium payment. A title insurance policy covering the lender does not protect your interest in the property; it only protects the money owed to the lender. In order to protect yourself, you need to purchase an owner’s title policy.
What does title insurance cover?
Unlike traditional insurance, which protects against future events, title insurance protects against claims for past occurrences, such as forged or improperly recorded deeds and mortgage discharges. When you become the owner to a property, you also become the owner (so to speak) of any title problems. A lawyer’s title exam will look back at the previous 50 years and should uncover any outstanding liens, for instance, but even the best title examiner may not be able to identify certain defects that are not evident from the records in the Registry of Deeds.
Examples of common title defects:
- Claims of ownership by another party;
- Undisclosed or missing heirs;
- Lack of a right of access to and from your land;
- Unresolved homesteads;
- Unresolved probate claims;
- Lost or incorrectly recorded documents (e.g., deeds, mortgages, mortgage discharges);
- Fraud. This can take many forms, including falsified mortgage discharges;
- Mechanic’s liens. Unpaid contractors, homeowner association dues or property taxes can result in liens on the property;
- Restrictive covenants
- Easements not referenced in the 50-year title search period;
- Encumbrances or judgments against property;
- Unmarketability of title.
My title exam came back clear… does that mean I don’t need title insurance?
In Massachusetts, lawyers are required to examine title going back fifty years unless there is something in the last 50 years that suggests an earlier title question. Even the most skilled title examiners may not find all problems associated with a property. Some risks, such as title issues due to recording errors, forgeries, or undisclosed heirs, are impossible to identify. If there are problems with a title that occurred prior to the lawyer’s search, those problems still exist and can, on occasion, cause problems in the future. Title insurance will protect you from title defects occurring before the 50-year lookback period.
Am I Required to Have Title Insurance?
If you borrow money from a bank to purchase your property, you will be required to purchase a title insurance policy for the bank, but it is your choice whether you purchase a policy for yourself. There is no law requiring you to purchase any title insurance on your home and land, but we would be remiss if we didn’t encourage you to protect your investment by purchasing a title insurance policy. When you purchase a home and receive the deed to the property, you become the official owner of the property. In addition to purchasing what you can see, you may unknowingly be purchasing hidden claims on the property that are attached to the title of the property. The cost of the insurance is a fraction of a homeowner’s investment in the property.
Why Doesn’t My Homeowners Insurance Policy Cover Me in Case of a Claim?
Home insurance policies and umbrella policies cover you in the event of physical damage to your property or for claims filed for damages to others after the policy is in place. These other policies do not cover claims against the title of your home or other claims that are from before you received title to the property. Lazan Law has overseen thousands of closings over our 35 year history. And we’ve never been busier! We most frequently work with home buyers and sellers in the Berkshires: Alford, Great Barrington, Hancock, Lee, Lenox, Monterey, North Adams, Pittsfield, Richmond, Sandisfield, Sheffield, Southfield, Stockbridge, South Egremont, Tyringham, West Stockbridge, and Williamstown, as well as communities beyond the Berkshires.
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