How Important Is Title Insurance?
Written by Phoebe Chongchua on Sunday, 10 April 2005 7:00 pm
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The simple answer, very. But even though title insurance is so important when you're buying real estate, many don't know exactly why. Yet if you've been paying attention to the news, title insurance has probably caught your attention.
"It protects the buyer in case there are old loans on the property, or in case there are existing easements on the property that were not disclosed," says Doug Jones, Vice President of Escrow Operations for Fidelity National Title in California.
Homeowners aren't the only ones interested in title insurance. Lately, title insurance has been getting a lot of attention from Insurance Commissioner, John Garamendi.
Last week, he held an investigatory hearing to learn more about illegal kickbacks that are allegedly taking place in the title insurance industry.
Since the beginning of the year, the Commissioner has been looking into the creation and use of "captive reinsurance companies."
According to the Commissioner's office, "These captives were created by lenders, builders, and developers to receive a portion of the premiums paid to title insurers, ostensibly to absorb some of the risk involved. In return, the lenders, builders, and developers allegedly referred business to the title insurer. This is an illegal practice in both California and federal law."
The Commissioner claims it can also drive up the costs on policies for consumers. The investigation continues.
This past year, there were 781,000 homes bought in California. The average premium on a title policy in California is $1,400, which can make the purchase of a home in California all the more difficult.
However, title insurance still remains valuable to the buyers.
Here are a few examples of how title insurance can help out.
"The title company is required to disclose where all of the easements on the property are [located]. Let's say that a [person] buys the property and the title company did not show that
there is an easement that cuts right across the buyer's backyard, and then when the buyer starts putting in a swimming pool the buyer [finds out] that SDG&E has an easement [in that location]. if the easement was there and the [title company] failed to disclose it [the title company] would have to make it right because there is devaluation in the property," explains Jones.
Another scenario plays out like this: A buyer purchases a home without being told by the title company that the home has back taxes owed on it.
"The title or escrow company will have to step up to the plate and make sure the taxes get paid. That way when the buyers purchase the property they are getting only their current taxes and not delinquent taxes," says Jones.
While this next example seems unlikely, Jones says he's seen it happen. "A guy buys a lot. He puts up three condominiums: A, B and C. Person A buys the first one, person B buys the second and person C buys the third one in a row. but a year later by mistake, because of the way the condo maps were issued, it turns out that A actually owns C and C actually owns A. and they didn't realize it. So the title company steps in and works with the existing lenders, and owners, to make sure that the owners actually own the piece of property that they thought they bought," explains Jones.
Then perhaps the least common example, a missing heir who later turns up and is entitled to equity in a home.
"The title company has to make sure that the buyer has clear title so that a missing heir can't claim an ownership to it," says Jones.
It's important to know that title insurance, required by the lender, only protects the lender's interest in the property and not the buyer's unless a specific policy is purchased in addition. Without the additional coverage, none of the above examples would be covered under only the lender's title insurance policy.