Understanding Your Owner’s Title Insurance Policy

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If you are considering buying a home, purchasing an  owner’s policy of title insurance is important because it protects your  property rights if a covered title issue or defect arises – but do you  know how to read it? Like any insurance policy, it’s important to know  the terms, what it covers (and doesn’t cover) and what obligations your  insurance company has to you (and you to them).

Most title insurance underwriters base their policies on forms  developed by the American Land Title Association (ALTA). Given title  insurance is governed by state-specific regulations, the availability  and scope of coverage may differ across jurisdictions, but there are two  types of title insurance policies commonly offered to homeowners: 

•     ALTA Owner’s Policy of Title Insurance, often referred to as the “standard policy”
•     ALTA Homeowner’s Policy of Title Insurance, often referred to as the “enhanced policy”

Like any legal document, reviewing the terms and conditions is  important. To help take the mystery out of these policies, we summarized  their five sections, based on the resources from ALTA.  

Section 1: COVERED RISKS 

This section lists the types of risks the policy insures against.  However, it also makes clear that those risks are subject to Exclusions  from Coverage (section 2), Exceptions from Coverage listed in Schedule B  (section 4) and Conditions (section 5). In the ALTA Owner’s Policy  (standard policy), there are ten covered risks, some of which include, but are not limited to: 

•     Someone else owns your property
•     Defect (problem) or encumbrance (claim against a property by a party  that is not the owner) on your title caused by fraud or forgery
•     Liens for real estate taxes or assessments that are due but unpaid
•     Title is unmarketable, which means that you are unable to sell your property to a purchaser because of a title defect
•     Right of access to and from your land

In comparison, the current ALTA Homeowner’s Policy (enhanced policy) includes 33 covered risks, offering more enhanced protection, including covered risks that occur after the date of the policy, such as: 

•     Forgeries or fraudulent activity, such as someone forging your signature on a deed.*
•     A neighbor builds a structure—excluding boundary walls or fences—that encroaches onto your land.
•     Inflation protection: the policy amount automatically increases by  10% each year on the anniversary of the policy date, for the first five  years, up to a    maximum of 150% of the original policy amount.

For a partial list comparing covered risks in each policy, click here.

Section 2: EXCLUSIONS FROM COVERAGE 

Exclusions limit the coverage of the policy. They deal with issues  that are outside the control of the title company and are therefore not  covered. While both the standard and enhanced ALTA policies include  general exclusions, the enhanced Homeowner’s Policy narrows some of  those exclusions and adds coverage for certain risks that the standard  Owner’s Policy excludes. Common exclusions in both policies include, but  are not limited to:

•     Governmental laws, ordinances, permits and powers, such as eminent domain or forfeiture.
•     Title defects or claims created, suffered, or agreed to by the insured (you).
•     Claims arising from bankruptcy or insolvency laws affecting the insured transaction.

Section 3: SCHEDULE A 

Schedule A sets forth the specific details of the title and policy;  essentially the “who, what and how much,” and it must be attached to the  policy to be valid. Schedule A typically includes the following:

•     Policy date: The effective date of title insurance coverage.
•     Amount of insurance: The dollar amount that the policy covers.
•     Name of the Insured: For this type of policy, the name of the home buyer.
•     Legal description: A detailed description that precisely identifies the land insured.
•     Estate of interest insured: Notes whether the policy covers fee  simple ownership, leasehold interest, or another type of legal interest  in the property.

Under the ALTA Homeowner’s Policy, some covered risks are subject to a  deductible and maximum dollar limit of liability, specifically covered  risks numbered 16, 18, 19 and 21. Schedule A will outline the exact  deductible and limit amounts for these risks. 

Section 4: SCHEDULE B (EXCEPTIONS FROM COVERAGE)

Schedule B lists the various exceptions from coverage that the title  company found, investigated and could not clear when it performed its  title search. Exceptions listed in Schedule B are a normal part of every  title policy and are specific to the property being insured. They  identify certain conditions or rights that are not covered by your  policy. However, these exceptions are limited in scope, and your title  insurance still provides protection against the most significant title  risks that could impact your ownership rights. Common exceptions include  things like:

•     Prior unreleased mortgages on the property
•     Easements
•     Property taxes and assessments
•     Restrictions on the use of the property
•     Other limitations on the title, such as homestead rights or survey issues, if no survey has been performed

By listing various items as exceptions, the title company is telling  the insured that these items are not covered by the title policy. That  means the title company is not obligated to indemnify or defend against a  claim based on excepted items.

Section 5: CONDITIONS 

The Conditions section outlines the relationship between the insured  and the title company and typically includes, but is not limited to, the  following:

Definitions: Contains the definitions of certain terms used in the  policy, such as “Insured,” “Insured Claimant,” “Knowledge” and “Public  Records,” to eliminate any ambiguity.

Claim procedures: Explains how to provide notice of a claim, what is  required to prove loss and the requirement that the insured must  cooperate with the title company in the handling of the claim.

Defense and Settlement: Describes the rights of the title company to  pay or settle the claim, and the determination, extent and limitation  of liability.

Arbitration: Most title insurance policies also contain a paragraph  that allows the insured or the title company to demand arbitration if  the amount is under $2 million.

Gaining a clear understanding of the Conditions section can help avoid surprises, should you ever need to file a claim.

This article offers a brief description of insurance coverage,  products and services and is meant for informational purposes only.  Actual coverage may vary by state or locality. You may or may not be  eligible for all of the insurance products, coverage or services  described in this article. For exact terms, conditions, exclusions, and  limitations, please contact our office for more information.

Source: Parts of a Title Policy | Home Closing 101