Monday, June 11, 2012

What is gap coverage?

“Gap Coverage” is a title insurance term that may not be familiar to those outside the industry.
When a title commitment is issued, it contains a standard gap exception:
“Defects, liens, encumbrances, adverse claims or other matters, if any, created, first appearing in the public records or attaching subsequent to the effective date hereof but prior to the date the proposed insured acquires for value of record the estate or interest or mortgage thereon covered by this Commitment.”
In plain English, what this says is that title insurance will NOT cover stuff put on the public record between the time of our initial title search (the date of the Commitment) and the time we record the mortgage or deed. The period of time from title search to recordation is the “gap”.
This standard exception is placed in the Commitment to give the title agent an opportunity to plan for removing the exception prior to issuing a policy. THIS IS IMPORTANT, because this exception NEVER gets put into an actual title insurance policy. We ALWAYS remove it first. SOOOOOO, when a title agent removes the gap exception, they are in fact, COVERING the gap with title insurance. This means that the buyer or mortgage lender is covered for matters put in the public record after the title search and before recordation. This is WHY we usually disburse at the table and give the buyers the keys.
In Pennsylvania, land conveyance occurs when a deed is delivered to a buyer for consideration. So when we have the signed deed and the seller has their money, the sale has officially occurred. Recordation is NOT necessary to convey ownership. Recordation protects the buyer by providing public notice of their ownership. An unrecorded deed still conveys ownership. When a title agent commits to insure over the gap, the buyer and lender have the full guarantee of the title company and don’t have to be concerned about interim issues.
Lenders in the Pittsburgh metropolitan area have required title insurance for so long that gap coverage is fully understood in the surrounding counties. When we do business in counties where title insurance is a newer issue, we find attorneys advising lenders and clients (incorrectly) that recordation is necessary to disburse funds or release keys. It’s just due to a lack of experience with title insurance.
Now, you may be asking, “Why do you put the gap exception in the Commitment in the first place when you always end up removing it in the end?” Well, when we underwrite a title, we decide if the seller is likely to have issues pending during the gap. For example, if there are pending lawsuits or we have a seller in financial distress, we will NOT disburse until we go to the courthouse, do a bring down and the document is recorded. This situation is rare, but it does happen. If we have a “normal” seller, we ask the seller to sign our “Affidavit of Disbursement” which gives us recourse to the seller if we disburse and later find something is wrong when we go to record. The exception gives us the chance to make the choice. In either case, the buyer and lender are fully protected.

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