MARKETABLE AND INSURABLE TITLE

Marketability and insurability of title are subjective.

The Pennsylvania Association of Realtors (PAR) sales agreement handles it this way: "The property will be conveyed with good and marketable title as is insurable by a reputable title insurance company at the regular rates......."

I like this language. It leaves the insurability opinion in the hands of title insurance companies. The determination of insurability may DIFFER between title insurance companies, so the seller and the buyer have options. As long as they can find a reputable title insurance company willing to insure at the regular rates, the seller has fulfilled their obligation and the buyer is protected.


What happens if you can't find a reputable title insurance company willing to insure the land? Well, you have to look at the transaction more closely to see if the problem is curable or is there a way to isolate the insurability problem and still close.

A question of insurability was introduced last week in a news group based on a case being examined by a title insurance agent in our area. It’s an interesting case because it raises the question of whether or not insurable title was bargained for when the sales contract was negotiated. I’ve edited the discussion as it was published in the news group last week based upon additional information, which has since been made available to me.

For purposes of discussion, we’ll call our property owners Mr. & Mrs. Smith. Some years ago they purchased a lot in a recorded plan on which a house and garage were constructed. Adjacent to the lot is an unopened alley, a portion of which Mr. & Mrs. Smith have improved and maintained for over 21 years as their driveway and sole access to their garage. In our discussion we’ll refer to this parcel as the “alley lot”.

Unopened alleys or streets, sometimes called paper streets, when identified in a plan of lots are rights of way created by the developer when the plan is recorded. The rights of way are created for the use and enjoyment of all the lot owners in the plan, whether or not the alley or street is ever opened. Over time, people have a tendency to start using these areas as if they owned them. [SURVEY ALERT – This is a really good reason to have property surveyed. Even your seller may not know that side yard is really a paper street. ]

The “alley lot” became an issue when in 1994 a neighbor asserted his right to use it and attempted to access his property by going over Mr. & Mrs. Smith’s driveway. The Smiths objected and hired an attorney. Their attorney advised them to file a claim of adverse possession, which he did on their behalf. Filing the claim in the Recorder of Deeds office stopped the neighbor and the Smiths and their attorney took no further action.

Mr. & Mrs. Smith now want to sell their property. They listed the property for sale; their real estate agent found a buyer and negotiated a sales contract. The contract identified the property including the recording references for both the deed and adverse possession claim.

Let’s stop here for a moment and consider the process of negotiating a sales contract. Any good contract requires a “meeting of the minds”. In other words, do all parties share the same understanding of the terms as set forth in the contract. This is important. Think about it. How many times have you and a friend read something and come to a different conclusion? It’s a fairly common problem. So unless you are a party to the discussion underlying the words on the contract, you really don’t know if the parties had a meeting of the minds.

Consider the facts of this case as we know them. Mr. & Mrs. Smith own a lot with presumably good and marketable title. They have a claim of adverse possession on a portion of an unopened alley, the “alley lot”.

Now, consider the perfect meeting of the minds based on that set of facts. The Smiths fully understand that they do not own the “alley lot”. When they list the property for sale, they explain this to the real estate agent. The real estate agent understands and markets the property for sale, explaining the facts to the buyer. The buyer bargains for the property with full knowledge that he is getting good and marketable title to the lot on which the house sits and is acquiring any rights the Smiths may have under the claim of adverse possession on the “alley lot”. We’ll assume for now that we have a perfect meeting of the minds and move on with the transaction.

The buyer hired a title insurance agent to insure title and conduct their closing. The title insurance agent completed a title search and reported back to the buyers and Mr. & Mrs. Smith that the "alley lot" was uninsurable as the attorney had not completed the legal work necessary to quiet the title following the claim of adverse possession. The title insurance agent gave Mr. & Mrs. Smith two options - postpone closing and perform the necessary legal steps OR allow the title insurance agent to escrow all or a portion of their proceeds to close now and then have the legal work done later.

At this stage, if we still assume a perfect meeting of the minds based on the facts as we know them, we would expect the parties to raise a fuss and let the title insurance agent know they didn’t bargain for good and marketable title on the “alley lot”. In fact, in a perfect world the real estate agent would have contacted the title insurance agent before title was processed to alert them to the claim of adverse possession. This is not a perfect world and it’s not clear what the parties knew or understood. A title insurance agent at this stage is raising an issue of insurability based upon the facts, as they understand them. We have no idea whether the title insurance agent considered and rejected any other options before narrowing the choices for the Smiths.

I got involved because Mr. & Mrs. Smith have hired The Closing Specialists® as title insurance agent for their cash purchase of a new home. Mrs. Smith was concerned about the delay of both transactions and she called me to discuss some options. I told her I am not an attorney and thus could not give legal advice. I offered to post the topic in our news group so we could discuss possible solutions from the perspective of title insurance.

In the original post, I followed the lead of the title insurance agent on the case. I assumed that all parties expected good and marketable title to the so called “alley lot”.

In the post, I first suggested that as the title insurance agent, I would call the mortgage lender and ask if the value of their collateral would be impacted by the elimination of the "alley lot". I would hope that the main lot on which the house sits is where the real value lies. If the mortgage lender and their appraiser concur, they simply modify the appraisal so that it does not include the "alley lot". The mortgage property description would only include the main lot and the title insurance policies would only insure the main lot.

My second call would be to the buyer. I would ask if they consider the insurability of the "alley lot" material to the transaction. Do they care if it’s included in their owner title insurance policy? If they don't care, we can insure the main lot on which the house sits and Mr. & Mrs. Smith can use a Quit Claim deed to release any interest they have in the "alley lot" over to the buyer.So if the lender and the buyer agree that the "alley lot" insurability is not an issue, we can move forward and close.

Following that post I had a chance to speak with the title insurance agent who was processing the file and as you can imagine, there was some information I did not have. For instance, I did not know about the garage and the fact that the alley was the sole access to the garage. Well, getting to and from a garage would impact value along with the use and enjoyment of the property so there was no doubt that the title insurance would have to cover access. I argued that since the alley was a right of way in a recorded plan, the right to use it could be insured, however, its use would be subject to the rights of others. We conferred with a title insurance company-underwriting attorney who agreed.

The buyer could receive good and marketable title for the main lot with the house and an insured right of way for the use of the “alley lot” including the assignment of any rights the seller may have under the claim of adverse possession.

Thinking the matter was resolved, I was totally surprised this morning when Mrs. Smith called to say the buyer was insisting that they quiet title on the “alley lot” and obtain from the court full, good and marketable title. Quiet title actions are not cheap and I suggested to Mrs. Smith that she and her husband confer with their attorney, review the terms of the sales contract, and let him advise them on their options, etc.

Only the parties in this transaction know what was said and to whom and what promises, if any, were made or implied. We hope that all parties had a perfect meeting of the minds and clearly understood the facts when they made their bargain.

But what if they didn’t?

What if Mr. & Mrs. Smith misunderstood the adverse action claim and really thought they owned the “alley lot”? They would have set the stage for a misunderstanding and may have implied and promised good and marketable title.

What if the Smiths and their real estate agent fully understood the nature of the adverse action claim but the buyer didn’t comprehend it and thought he would own the “alley lot”?

What if everyone had a perfect understanding of the facts and bargained in good faith but the buyer has just changed his mind?

These are all possibilities and the resolution of who said what to whom, etc. is not the business of the title insurance agent. The paths to insurable title have been identified. The parties themselves will have to decide which path to take, insurable access rights, which already exist, or agree to change the underlying title by further legal action creating full good and marketable title to the “alley lot”.

I do hope that the parties are able to amicably resolve their differences and that sharing their story here in TitleInsuranceTalk will help you better understand the role of a title insurance agent.

TITLE SEARCH vs. ATTORNEY TITLE OPINION vs. OWNER TITLE INSURANCE

TITLE SEARCH vs. ATTORNEY TITLE OPINION vs. OWNER TITLE INSURANCE.....WHAT'S THE DIFFERENCE??

The difference is level of risk. The purchase of real estate is typically a family's largest investment. If you are in a position to choose whether or not to buy an owners title insurance policy, you need to understand the difference between the products.

TITLE SEARCH: I'm not sure about other states, but in Pennsylvania, there are no standards for a title search. Searchers or abstractors are not licensed or certified and even if they were, there are no standards; there are no minimum requirements. So what are you getting when you buy a title search? I have no idea. You might get a lot of information, or not. You'll likely get raw data from the courthouse records. If the searcher/abstractor gives you an opinion, they have no legal authority to do so, so how will you hold them responsible if there is a problem later? Maybe if you're lucky you can get a refund on the cost of the search. Basically you are alone and totally at risk.

ATTORNEY TITLE OPINION: This is kind of an old fashioned practice and I'm surprised how many folks still rely on this method. Even in situations where a mortgage lender is requiring a loan title insurance policy to protect the interest of the mortgage lender, we see homebuyers opting to take an attorney title opinion in lieu of an owner title insurance policy. I have reviewed many attorney title opinion letters and am surprised at what they do not guarantee. Many items that would be covered by an owner title insurance policy are not covered or guaranteed in an attorney title opinion. This is definitely a situation in which the consumer must obtain the opinion and carefully read it before closing. I would strongly suggest that you ask the attorney to compare in writing the differences between accepting the opinion vs. buying the owner policy. Often there is no difference in cost or very little but the difference in risk to the homeowner is material. The bottom line for homebuyers who choose to accept an opinion instead of insurance is that the opinion is only as good as the person who issues it and the guarantee that comes with it is only as good as that attorney's willingness and financial ability to perform if you get into trouble later.

OWNER TITLE INSURANCE: The title insurance industry is regulated at the state level. The industry has adopted national standards through the American Land Title Association (ALTA) and more narrowly defines those standards in each state. Because the title insurance underwriter is affirmatively covering risk, they have clear and detailed standards for search and examination of title. There is a defined due diligence method that must be executed prior to closing and insuring the title. Roughly 80% of the premium collected for title insurance goes to pay for search, examination, and clearance of potential claims - preventative actions - prior to issuing a title insurance policy. The title search and examination performed prior to the issuance of an owner title insurance policy is akin to the physical examination many people go through before they can purchase some types of health or life insurance. The title examiner is looking for pre-existing conditions and then resolving them prior to closing. Title examiners and underwriters do not want to pay claims so they are picky. Pickiness is good for the homebuyer. Buying an owner title insurance policy is buying protection.

OK, now if the examination is so thorough, why are there still claims? Well, the beauty of title insurance is the extra stuff it covers. The big two sources of claims are fraud and human error. Let's talk about error first. I'm sure you consider yourself a very careful person. Do you ever make a mistake? Of course you do. Everybody does. Setting aside possible mistakes by the title searcher/abstractor or the title examiner, what about the courthouse? Nowadays the Recorder's office is computerized. What if the data entry clerk misspells a name and a mortgage gets lost in the system or how about typo in a deed? Errors like this may not be found for years and can cause serious damage to the integrity of a title. What if the local taxing authority gives the wrong information to the title agent and the property goes up for tax sale the year after you bought it? These are common situations caused by human error that are covered by owner title insurance.

Finally let's talk about fraud. Identity theft is real. Sometimes the thief is a perfect stranger and sometimes the thief is someone close to the seller. Here's an example. A married couple separates. Let's say the husband moves out of town or goes on vacation - he's just out of touch with the property for a while. The wife decides to sell the house, take the money, and leave town to start a new life. She gets an accomplice to pose as her husband. He signs the deed. He might not even attend closing. He might get a willing notary who isn't that careful to acknowledge his signature. She takes the money and leaves town. You move into the house - make it your home, and then someday the husband comes and knocks on the door. What happens if the thief gets past the checkpoints? The most catastrophic title claim occurs - a total failure of title. If that happens to you, you'll be thankful you decided to buy owner title insurance.

Buying an owner title insurance policy is buying real protection. It's money well spent.