At just about every closing, our home-buyer clients ask us for a brief explanation of title insurance and why we recommend that they purchase an owner’s policy of title insurance. While there are dozens of reasons to purchase owner’s title insurance, which you can read about here, we explain the benefit that arises the most in practice: an owner’s policy of title insurance will someday help you sell your house.
An owner’s title insurance policy is typically purchased at closing with a one-time premium. The policy will insure your ownership interest in the house (your “title”), at the value for which you purchased, for as long as you own the house. This means that the insurance company will pay all necessary legal fees to defend against a challenge to your title and, in the extremely remote chance of an unsuccessful defense resulting in your loss of title, the insurance company will indemnify you (that is, reimburse you) for the insured value of the home. Every mortgage lender requires its own policy to protect its interest in a property, and so should you.
So how does an owner’s title insurance policy help in the sale of one’s home? In Massachusetts, we have an imperfect system of recording land ownership. Deeds and other instruments affecting title to real property – including mortgages – are filed in the Registry of Deeds and accessible to all. One can look back through the Registry records to view the “chain of title” leading to the current owner for any property.
Accordingly, to determine who owns a particular property and which lenders, if any, may hold mortgages on that property, one may think that a review of the Registry’s records will conclusively show title to that property. Unfortunately, many documents are recorded in the Registry that, for one reason or another, are imperfect. For instance, a past property owner’s heirs might not have consented to a prior sale of the house, or a prior deed from a real estate trust might have incorrectly identified the trust at issue. Wall Street’s purchase and sale of mortgages also creates a reoccurring set of title problems. Past mortgages are discharged by the wrong bank, or never discharged at all; assignments of those mortgages are not properly recorded; or a foreclosing bank may have missed a step in the cumbersome foreclosure process. The result of any of these problems is that you – now the selling owner of the property – have a title issue that might prevent a buyer from purchasing your home.
You and your buyer have signed a Purchase and Sale Agreement, but your buyer’s title exam reveals a title issue impairing your ability to convey good and clear record and marketable title to the property. But fear not. Because you purchased an owner’s title insurance policy when you bought the home, your attorney will simply request a “Letter of Indemnification” from your title insurer, which essentially says to your buyer’s attorney, “We, seller’s title insurer, will take care of the title issue revealed in your title exam and reimburse your client, the buyer, for anything that arises out of it. You may proceed with the closing.” If you did not buy an owner’s title insurance policy, you would instead be signing a new fee agreement with your lawyer to begin the time-consuming and possibly futile task of correcting the title defect, which may involve tracking down deceased heirs of prior owners, getting corrective documents from long-defunct banks, starting a proceeding in the Land Court, etc...
In short, purchasing owner’s title insurance is a small price to pay for a promise of a smooth and timely closing later. An ounce of prevention is worth a pound of cure.
Do you have questions about purchasing or selling your home? Please give us a call today.