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A Home Buying Riddle: What Insurance Coverage Ends The Day You Buy It

By Christopher Carter - Real Estate Broker Associate

October 12, 2023

Unlike Homeowners or Auto Insurance, Real Estate Title Insurance coverage periods end on the day they are issued and extend backward in time. However, the policy's Protection Period extends forward and stays in place until the Property is sold to a new Owner. Title Insurance protects House and Condominium Owners against Future Claims based on what could have already happened before they bought (prior acts by previous Owners). Yes, I know this is already confusing, though stick with me for a bit longer.

Because it is so misunderstood, many buyers look at Title Insurance as just another vague (and possibly unnecessary) expense they have to pay at Closing.

Owning Real Estate is about the rights an Owner may exercise concerning the use, Occupancy, and Disposition (resale) of a specific piece of Property. Those rights are transferred each time the Property is sold to a new Owner.

Title: A general concept that expresses the Ownership of something. It refers to an understanding and acceptance of the Owner's rights.

Deed: The written document that specifically describes and acknowledges ownership of Real Property. Deeds are recorded in the County where the Property is located.

Depending on the location and type of Property, the history of Owners may go back a couple hundred years. This is especially true in older US East Coast cities and towns whose histories may go back to the 1700’s.

It is very important to note that the Title issues we're discussing today attach to the Property, not to individual Owners. Undiscovered Title defects remain with the property through all ownership transfers until they are found and resolved.

Title Insurance protects current Owners against future Title problems resulting from the actions of previous Owners.

Challenges to an Owner's full right and ability to sell a Property might come from:

• Improper boundaries from an inaccurate survey
• Buildings encroaching on easements, setbacks, or lot lines
• Open and unresolved Building Permits
• Delinquent Taxes, Unsatisfied Mortgages, Foreclosures started
• Errors in identification of the property or Buyer/Seller
• Previous Owner's Spouse, Ex-Spouse, or Heirs Claim Ownership
• Liens Seeking Payment - Property Repairs, Unpaid Spousal/Child Support, COA/HOA Assessments

Problems such as these that can prevent or restrict an Owner's ability to Legally Use, Occupy, or Sell the Property are Title defects, also called "clouds" on the Title. Many Title defects or encumbrances are found in Public-Record Documents such as Liens, Court Judgements and Mortgages. Like Deeds, these are recorded with the County where the Property is located.

Though there can also be unrecorded Title issues that will derail a Closing. These are found in the Building/Zoning Department and other Third-Party Files, not just Legally recorded Documents. Common examples of these are Municipal Code Violations and Fines, Unpaid Utility Bills, Owners Association Charges, and Open Building Permits. A Municipal Code Search is part of the Pre-Closing Process that attempts to find any outstanding issues.

In a Title Search, earlier Deeds, Court Records, Property Indexes, Municipal Records, and other Sources of Information (both recorded and unrecorded) are closely examined to reveal any Possible Ownership defects, encumbrances, and restrictions that may have attached to the Property over the years.

Any of these could prevent the current Owner from Legally and Freely Selling the Property. They could also limit the anticipated future use of the Property by a new Owner.

Most defects found in a Title Search can be Legally "cured" by the Settlement Attorney or Title Company prior to Sale's Closing.

Once the Title Company or Closing Attorney's Office is satisfied that a Property has a Clear Title (no unresolved defects/clouds), a Title Insurance commitment and policy may be issued which will protect the new Owner from problems that arise from the kind of complications mentioned above.

So...if Title Agents and Attorneys have already checked for Title defects, why is Insurance needed?

Because even with a careful and diligent Title Search, there can be hidden hazards from the past that affect both the Seller's right to transfer and the new Owner's future Property Rights.

Hidden Title hazards may include:

• Forged Documents, Fraud, or other Criminal Acts
• Mentally incompetent previous Owner
• Improper Trustee, Corporate Officer, or LLC Member Authorization to sell
• Seller entered into Contracts with multiple Buyers
• Inaccurate Property description; Deed Transfer issues
• Undeclared Marital Status, Unknown Florida Homestead Claimant
• Similar or identical Owner names (unrelated, Sr, Jr)
• Probate issues, Undisclosed Heirs, Unknown Wills

An Owner's Title Insurance policy does not protect current Owners from Title or Deed issues that attach to the property caused by their Own actions. (Remember - the coverage period extends backward from the issue date).

In any Title Insurance policy, there are some exclusions that are NOT covered. An example of this might be excluding challenges to lot lines if a new Survey was not performed as part of the Purchase. It is very important for Buyers to fully understand the exceptions and exclusions in their new Owners Title Insurance policy. Ask your Settlement Agent to explain them in detail.

An Owner's policy is for the Full Value of the Real Estate Purchase and lasts as long as the current insured Owners or their Heirs have Uninterrupted Ownership Interest in the Property. Remember - a Sale to another Owner is what ends coverage for a current Owners Title policy.

If a Claim against ownership arises, the Title Insurance company is there to address any Legitimate Title defects and Valid Claims against Legal transfer not found and addressed in the Title Search, and to cover the Costs of defending the Owner/Policyholder's Property Rights.

Title Insurance premiums are a one-time, single payment made at Closing. In Florida, local practice and the purchase contract determine whether the Seller or Buyer pays the new Owners Title Insurance premium at Closing.

Although Owner's Title Insurance is not required in Florida (highly recommended), when there is Mortgage Financing Lenders want to protect their investment in the property from errors, defects, and adverse claims to ownership, so they require a separate Lender's Title Insurance policy as a condition of approving the Loan. A Lender's policy carries an additional Separate Premium, and has different coverage amounts and terms. Buyers are responsible for paying the Lender's Title Insurance Premium.

There we are - a brief and general overview of Title Insurance and its place in a Real Estate Deal.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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