Two of the most important things you need to know about title insurance — and you need to know them — are these:
- The percentage of claims is in the single digits;
- The cost is high considering the risk, but New York State law bars discounting.
It also is worth knowing that there are two exceptions to the prohibition against discounting:
- Homeowners who refinance with the same company within 10 years;
- Purchasers from the building’s sponsor of condos in new developments or conversions into condos with more 10 units.
Discounting would be nice, given the cost. For a $1 million property, the one-time premium runs in excess of $4,000. Adding a rider that protects the insured if the fair market value should rise over time would be 10 percent more.
The industry argues that title insurance is of vital importance because it protects buyers from undiscovered claims of ownership following purchase.
As title company executive and lawyer Marc Israel explains, title insurance covers any legitimate claim against a property.
There must be an unbroken chain of title, even if caused by mistakes, errors or fraud; the title must be free of liens and encumbrances so that ownership is transferred without entanglements; and the insured must have full use and access to the property.
It could happen, for example, that a long-lost relative who had been named a beneficiary in a will surfaces years after the property changes hands to claim ownership or partial ownership.
Or there might have been a lien that didn’t turn up in a routine title search. Such a lien could have resulted from an unpaid debt for which there was a court judgment or a potential liability involving a lawsuit that has dragged on forever. Even a series of unpaid parking tickets can result in a clouded title.
In addition, there have been instances of fraud. An actual example some years ago occurred with a Greenwich, Conn. house for which the late owner obtained several mortgages by having forged false documents showing that previous loans had been paid in full.
Other wrinkles to title insurance relate to single-family houses and the owner’s legal right to use all of the property. Among other things, that proviso means no encroachments — say, a fenceline created by neighbor’s greed or survey errors. A driveway that breaches the property line would be a bad thing.
With respect to co-op apartments, for which stock, not real property, changes hands, the industry has come up with something called leasehold insurance; in the vernacular, usually it is called title insurance. But the benefit is debatable.
When a claim is made, the insurance company has the option of paying off the third party — that is, not you — to settle a justified claim.
Another option is to pay the owner the full amount of the policy, even if the property has declined in value or the claim is below the policy amount. Lacking a market value rider, purchasers are out of luck if the property has gone up in value: The sum paid will not exceed the policy maximum.
Offhand, I’d say the title insurance business is a pretty good one: Lots of money going in, not so much leaving.
Tomorrow: Get out!
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Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022