What kind of title insurance policy should the real estate buyer get? Does it make a difference? Is there a cost difference?
There are different types of title insurance policies with different coverages. In the past, standard or extended policies were the norm, but the Homeowner’s Policy (“ALTA Homeowner’s Policy for One-to-Four Family Residence”) has become the new standard for residential transactions. This expanded coverage policy is the default policy called for in Paragraph “e” of the NWMLS Residential Purchase and Sale Agreement. It is the best choice in most residential transactions involving platted lots with an existing home. But it’s not available for all transactions, including waterfront homes, large acreage, or if the buyer is a corporation.
The Homeowner’s Policy Benefits
The Homeowner’s policy offers significant benefits in three respects: First, affirmative coverages are built right into to the policy for such things as off-record survey related matters, the existence or impact of easements, boundaries and encroachments. And it includes significant areas not previously covered by title insurance, such as certain zoning problems (including relating to building permits) and platting irregularities. Second, the policy is written in “plain language.” It has never been easier to interpret the title policy’s “fine print”. And finally, for the first time some limited coverages are available for future events historically excluded from policies – including, for example, you discover the former owner didn’t get a building permit for the out building that the County has now red tagged.
There may be a trade-off though because some covered matters have deductibles – either a stated percentage or a dollar amount, whichever is less. It is important for the Realtor® to remember that the benefit would be valuable only if (1) a defect was not subject to a deductible, or (2) if the cost of taking care of it exceeded the deductible. In other words, if the loss is lower than the deductible, no payment would be made under the policy even if the claim would otherwise be covered. If it exceeds the dollar limit only the amount between the deductible and that limit would be covered.
For example, assume the owner has to spend $2000 to remove and rebuild a wall and fence because they encroach onto the neighbor’s land. While it’s covered by the policy there is a $2500 deductible. So, none of the cost is reimbursable. Now, if the cost was $5000, then reimbursement would be available for $2500 – the first $2500 is the owner’s responsibility because of the deductible, and the coverage caps out at $5000.
In the example above, the extended coverage policy would have been an appropriate option – it costs more initially, but there are no deductibles in the event of a covered claim. Ultimately, a buyer who has questions about the different types of policies can contact a Ticor Title representative or if they are concerned about which policy would be best suited to a transaction should seek legal advice.
The Home Buyer Has A Choice
Even though the Homeowner’s policy is an excellent choice the Realtor® should always make sure that the buyer and seller understand that there are options to choose from. If another form is desired by the buyer it must be addressed in the purchase and sale agreement, and then it must be confirmed that the title commitment actually reflects the correct policy.
Do you have questions or comments about the ALTA Homeowner’s policy?