If you’ve been investing in real estate for any length of time, you’re probably well aware of the wisdom of securing an owner’s title insurance policy whenever you purchase property. But are you aware the exceptions to coverage in the policy?
When automobile or health insurance companies issue policies, they generally are policies that assume the risk of liability, with certain exclusions. This is not exactly the case with title insurance policies. Title insurance companies don’t assume risk; rather, they are in the risk elimination business, because these companies don’t issue title insurance policies until they are as certain as they can be that there are no title issues that will lead to claims. Where there are problems, those problems either cause the title company to refuse to issue a policy or to exclude coverage altogether for the issue by listing it as an exception.
Title insurance exceptions are found in every title policy. There are standard exceptions in every policy and there are sometimes exceptions unique to a particular real estate deal. The exceptions are always found in Schedule B2 of the title policy. Standard exceptions can include (but are not limited to):
• Survey matters
• Taxes or assessments not shown by public record
• Rights or claims of parties in possession not shown by public record
• Mechanic’s liens not shown by public record
Depending on the particular circumstances of the deal, there can be other exceptions, such as judgments, liens and breaks in the chain of title. Because these exceptions to coverage can be deal killers, it is important to address them promptly. Some of these exceptions are quite easily dealt with—an affidavit or survey removes the exception. For example, if the seller gives an affidavit at closing that there have been no improvements to the property within the 90 days preceding the sale, or that if there have been improvements, they have been paid for, then the related exception can be removed. Likewise, if the parties obtain a survey, the survey exception can be removed.
On the other hand, some exceptions cannot be so easily dismissed. Outstanding judgments and liens must be paid at or before closing. Only in rare circumstances will a title company insure over such a cloud on title. In the overwhelming majority of cases, the judgment or lien must be paid to move forward with the closing of the transaction.
While there are always exceptions to the rule of coverage in title insurance policies, such policies are still well worth the nominal price for the peace of mind they purchase. Significant title problems are relatively rare, but when they do occur, they would almost always be devastating without an owner’s title policy.