Title Insurance – Can’t Live With It – Can’t Live Without It

Some short sale clients ask:  “Why do you charge an up front fee for your services?  and what good is $100, really?  What can you cover with $100?”

The lion’s share of the initial $100 charge is to pay to have our client’s title searched.   In the Virginia conveyancing industry, title examination is almost always the job of the buyer’s representative.   But it did not take long for us to realize that a proactive cleansing of title issues can save many a short sale!    The authorization that we negotiate for short selling the home of an upside down seller is limited.   It rarely extends more than 30 or 45 days.  Likewise, the buyer’s mortgage loan commitment has a limited shelf life.   Sometimes the window for the two authorizations is only a few days.   If we wait for the buyer’s closing representative to tell us when they discover a title issue, it may be too late to fix it during the window of dual approvals necessary for a short sale closing.

This month we had more than one transaction in which we represented the buyer and the seller’s short sale representatives did not obtain a full search in advance.   We discovered a few days before closing of the existence of serious title defects.  The seller’s representative and realtor tried to bully the buyer into closing with title insurance from the seller’s previous title company.  That fixes everything, right?   The long answer follows below for the truly inquisitive.  The short answer is no.   The law and the standard real estate contract in Virginia have always acknowledged that insurable title is not equal to or as good as marketable title.    The buyer who compromises on getting a GOOD title and marketable title takes the risk that he may not be able to find an equally compromising buyer again when he goes to sell.

The background behind this truth some may consider TMI, but here goes:

The famous English Jurisprudence Guru, William Blackstone, once described the conflicts and rights to real estate  title between husbands and wives as “The Great Clog in the Wheel of Alienation.”   “Alienation” is an old Common Law way of describing the passing of title from one owner of real estate to the next.  It is sad to think that the venerable institution of marriage may at times be a Clog.

Always reactive to such problems, and probably having been involved in some of the above mentioned Clogging activity which frequently follows a divorce, our beloved legislators tried to pass laws to clear the clog a few hundred years later.   First, they gave women the rights of men which meant getting rid of age old protections such as “dower” that were created to quiet the consciences of law makers from bygone eras when women could not own real estate. But quiet consciences did not give rise to quiet titles.

If Dower was part of the great Clog in the Wheel of Alienation, then Title Insurance was supposed to be part of the great glob of grease that would, along with abolishing dower, unfreeze the often frozen wheel of home sales.  But before you rely blindly on title insurance to be the  fix all for real estate, be aware:

First, title insurance policies give far more protection for mortgage companies than for home owners?   The savvy homeowners PAY EXTRA to get enhanced policies to get coverages more like what the lenders get routinely.

Secondly, those darned polices they give us are not actually INSURANCE policies!    They are policies of indemnification.  What?   What is the difference?  Insurance is defined as:   “the act, system, or business of providing financial protection for property, life, health, etc, against specified contingencies, such as death, loss, damage, or some other harm”.  An event of harm, your death for example, occurs.   Your beneficiary receives a predetermined monetary benefit whether or not they even miss you.   But to indemnify someone is “to compensate them for a loss, injury, expense, etc;  to reimburse.”   do you see the subtle difference?   Protection against a harm versus reimbursement for losses suffered after the harm has already hit you in the pocketbook.   If you are resourceful and scheme up a way to minimize the quantitative loss from a title issue, you may never be able to avail yourself of the indemnity of Title Insurance!   

Insurance is having an open carry 9 mm on your holster when you walk your pitbulls.   Indemnification is having a detective come to the hospital an hour or two after you have been mugged to investigate a  possible assault and battery and the theft of your priceless pomeranian.

A real world example – You purchase your home with a fly by night title company that routinely only searches back one or two owners in the chain of title.   It saves them almost $50 a search to avoid going back 60 years as is the prudent minimum.  Unfortunately for you, 3 owners back in the chain of title, and only about 8 years ago, the owner took ill, ran up a huge hospital bill, paid for some of it with a credit card and never paid the rest.     You list that home for sale after you’ve owned it for several years and get a good offer from a buyer who uses a conscientious real estate attorney for her closing and the judgments of the hospital and credit card companies, now totaling more than $20,000 are discovered.   Technically, if Title Insurance was an insurance, the hazard or the harm would exist and the title company would take care of the judgment liens against your title right away.   However, since Title Insurance is to indemnify your loss and not really to insure against hazards, the title company is within their contractual rights to wait until your deal is killed by the judgment liens and to pay your quantifiable non-speculative damages after that.   Sometimes, the damage you suffer must be “fixed”, i.e., you have to resell the house for a lesser amount to a buyer with greater risk tolerance and then you total up your damages, e.g., lost profit, carrying costs, legal fees, etc..

In their defense, but also in their own self-interest, Title Companies do frequently attempt to fix title flaws before they have to be indemnified.   The title insurance industry retains  law firms that have impressive litigation skills and real estate knowledge.  But at some point,  usually after an undeniable title flaw arises  that will not go away without paying a claim, Title Insurance becomes like all insurance,  they fall back on the #1 defense tactic – they delay.  That delay often comes at the most disruptive time possible in the life of a policy holder, e.g., when they have put in a contract on a new home or accepted a job on the west coast.  

This firm believes in title insurance and would never recommend buying real estate without it.   But neither would we have our buyers buy a home with an unnecessarily risky title.  We won’t let our clients purchase with blind reliance upon title insurance as a panacea for curing all title defects.  Defects are fully disclosed and discussed. Sometimes you need brakes on a transaction, not grease.  That is when only having legal representation will save you the future heartache of delay and indemnification.

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