In a recent post, "query: how long does title insurance exist on a house", I discussed a transaction we closed last week in which we had sought an indemnification letter from the current owner's title company, but failing to obtain one, opted to set aside an escrow from the prior owner to resolve the issue. This raised the question of why in this transaction did we choose to do one or the other. I'd like to discuss the specifics of this closing but also just chat little about when it's appropriate to close using indemnification or escrow set asides.
In the case we closed last week, time was a big consideration. Our buyers really wanted to close on Friday so they could move over the weekend. The whole transaction moved pretty quick from the original order date. We believe in rolling with the punches and as much as we can within the confines of ethical and lawful behavior, accommodate our customers. TCS staff takes a "can do" attitude and gets some pleasure when we can make things happen.
So, when the inheritance tax issue came up, we contacted the current owner immediately and started communications with their title agent. The prior post explains what happened.
A request from one title company to another for indemnification over an issue clouding title is a common temporary fix to a problem. It should only be used to clear title issues that are obviously easy to resolve with follow-up by the title company who issued the prior owner policy.
Notice I said OWNER POLICY. If the owner of the property didn't purchase title insurance, we can't seek indemnification.
So, in our case, we contacted the current owner's title insurance company, Guaranty Title & Trust and requested that they issue an indemnification letter for the inheritance taxes we believed were owed on a prior estate. If they had agreed, they would have faxed us a letter indicating that our title underwriter and our title agency would be held harmless should a claim arise from the underlying question of inheritance taxes. It's basically an extension of the old title insurance over the new title insurance.
Indemnification letters take about 48 hours to get when a title underwriter responds quickly but upon receipt we can close.
Guaranty Title & Trust refused to indemnify. In my opinion, unreasonably so, but I had no choice but to seek another path to a successful closing and fulfill our customer's hopes, if possible.
As luck would have it, the Realtor in the transaction was also the prior owner. She had sold the house two years ago to our seller AND she had an owner title insurance policy which she faxed to me with haste. I reviewed it and seeing no exception and that it had been issued by Old Republic, knew they would take care of this issue for us. Though I was confident that Old Republic would issue an indemnification letter, we had run out of time. We were inside of the last 24 hours to close and unless the parties wanted to postpone the closing into the following week, we'd have to close with an escrow aside.
We asked the current seller and the Realtor - the prior owner - if they could put up $2500.00 in escrow to cover the inheritance tax issue pending resolution. Both said yes, but in the end the Realtor - the prior owner - put the money up. Our current seller had gone subprime if you remember from the prior post. He had done 100% financing with that lender, had a second mortgage still owing to the Realtor - the prior owner, and hadn't paid any property taxes since purchasing the property two years before. He was facing imminent foreclosure and tax sale and really hadn't enough money to cover an escrow. [Pretty typical subprime story.]
So, happily we were able to close on time and everyone was happy.
Indemnification letters put the onus on the prior agent to look at the title issue raised, determine if it's legitimate and if so, cure the problem. It's a fairly routine process. We get indemnification follow-up letters from title underwriters a few times each year. Most often, the underlying issue isn't a problem and we can explain that and they move on or it's an unsatisfied mortgage and we contact the paid lender again and push them to file a satisfaction.
With escrow set asides, the onus is on the escrowee - whoever put up the money - to follow-up and cure the problem. In this case, we instructed her to contact Realty Abstract and give them a copy of our title commitment. We know them to be a knowledgeable and reputable title agency and told her they would know what to do. Within 48 hours they had their abstractor pull the estate file noted in our commitment. Their abstractor, Ray, who is a good buddy with our abstractor, Tim, got to raz him over his mistake. Tim called me immediately to own up to his error and apologize. He's a perfectionist and rarely - rarely makes mistakes so he was duly mortified. He is human - and therefore WILL make mistakes. THAT'S WHY IT IS SO IMPORTANT TO BUY OWNER TITLE INSURANCE. So within a few days, the matter is resolved and everybody is happy.
Most title issues can be handled with indemnification letters or escrow set aside pending cure. There are some that can't and those are the ones that may or may not be curable. Those type of title issues postpone closing pending cure. If you happen to pick a piece of real estate and the title insurer refuses to close without curing a defect, please don't be mad at the title company. They are doing their job and protecting you. Believe me, they want to close because they'll make money if you close. Realize that even if your transaction does NOT close, you will owe for the title search and examination. Lots of work was done to get to that point. It's just like the home inspector. You pay him to tell you if there are problems with the house. You pay the title examiner for the same kind of service.
Be well and let's hope your title is clear. Remember to insist on owner coverage. Don't blindly waive it or think it's unimportant. Even the most fastidious humans make mistakes and that's why you want coverage from a reputable company.