Title insurance is a crucial component of virtually any real estate transaction because it helps to mitigate the losses an owner, lender or tenant may incur as a result of errors and omissions in the title record that affect the insured’s use and enjoyment of its property. However, when making a claim on a title policy, insureds are often unaware of pitfalls that could seriously impair or prevent a meaningful payout by their title insurer. Below is a brief discussion of some major pitfalls to be aware of when making a title insurance claim.
1. Preserve your rights
Be aware that you do not have to use the form provided by your title insurer to make a claim against them. A simple letter that identifies the title policy involved, describes and sets forth the basis of your claim and provides notice to the insurer should suffice to begin the claim process with your insurer and reserve your rights. It is a very good idea to have an attorney review your title policy and advise you as to the basis of your claim before sending the letter.
2. Expect resistance
Your insurer may resist your computation of the amount of loss for your claim. Like other insurers, title insurers make money by resisting payment of claims. Included in the boilerplate language of the standard ALTA title insurance policy is a determination of liability clause that specifies the title insurer is liable only for the lesser of the amount of insurance (the dollar value of the insurance policy) or the difference between the value of the property as insured and the value of the property subject to the risk insured against.
In other words, the title insurer will pay, at most, either the face value of the policy or the loss in value of the property resulting from an insured title defect, whichever is less. One way to maximize your recovery and combat the undervaluing of your claim will be to keep thorough records that show how the circumstances causing your claim adversely affect your business and diminish the value of the covered property.
3. Invest in protection
Be aware that the structure of your transaction when you acquired the property may affect your ability to recover from your title insurer. Purchasers who obtain property through a sale of equity may have knowledge pertaining to the title defect their predecessor possessed imputed to them, potentially preventing recovery under the title policy. This is in contrast to an all-asset sale, which typically does not result in such an imputation of knowledge. Purchasers of property though the sale of equity may want to consider purchasing the ALTA 15 “Non-Imputation” endorsement, which prevents a title insurer from relying on such imputed knowledge to reject a claim.
4. Use common sense
Finally, pay careful attention to the details in the due diligence phase of every real estate transaction. While title insurance is useful to limit an insured’s risk exposure, it has its flaws and is not a substitute for good judgment. Be sure to utilize an attorney when reviewing any title commitments or pro forma title policies for a property and seriously consider purchasing additional coverage through ALTA title policy endorsements. Many such endorsements are often inexpensive and can vastly increase the scope of title insurance coverage and limit the ability of a title insurer to reject or diminish a title insurance claim.
Ultimately, title insurance is integral to protecting those that own, lease and lend against property, but insureds must take care when asserting their claims against title insurers. These suggestions are but a few of the many steps that can be taken to protect owners, tenants and lenders from title defects.