Insured Closings and Title Insurance
Closing protection and title insurance have garnered attention in the closing arena in the past few years. From title issues to closing problems, REALTORS® are increasingly asked by their clients whether either is worth the cost. This article, written by the Joint Committee with the Cincinnati Area Board of REALTORS® and the Cincinnati Bar Association, provides some talking points and answers some of the most-asked questions.
What is an Insured Closing?
Insured closings through a Licensed Title Agent involve two components. The first deals with the title to the property and title insurance issued for the state of the title. The second component deals with the handling of funds and documents by the licensed title agent. A title insurance policy does not cover losses due to the mishandling of funds or documents by the Licensed Agent, but Closing Protection Coverage does.
So, what exactly is Closing Protection Coverage?
Closing Protection Coverage is available when title insurance is being issued to a lender or to another party, such as the buyer/borrower. Subject to certain conditions and exclusions specified in the Closing Protection Coverage form, the protection covers:
- Losses due to theft, misappropriation, fraud or other failure for the licensed agent to properly disburse settlement, escrow or closing funds; and
- Failure on the part of the licensed agent to comply with any applicable written closing instructions, where the closing instructions have been agreed to by the licensed agent.
Who can ask for Closing Protection Coverage?
Closing Protection Coverage is available to the lender, buyer/borrower/seller/other party to the transaction. The Notice must be given to the parties (for example, the seller and buyer) at time the title request is placed with the Licensed Agent. The cost will appear as a separate line item on the HUD and the whole cost is remitted directly to the licensed agent’s underwriter.
Are there items excluded from Closing Protection Coverage?
There are some exclusions and conditions. They include:
- loss or impairment of your funds due to bank failure, insolvency or suspension unless the licensed agent fails to deposit the funds in the bank specified in the closing instructions.
- liability to a covered buyer, borrower or lender is limited to the amount of the applicable owner’s or lender’s policy of title insurance
- liability to a covered seller is limited to actual loss of funds and shall in no event be greater than the gross sale price due to the seller in the covered transaction
- notice to the Company generally needs to be given within one year from the date of Closing.
Closing Protection Coverage is one part? What does Title Insurance do for me?
Two of the most common types of title insurance are lender’s title insurance and owner’s title insurance. A lender’s policy may be required by a mortgage company or bank when a loan is secured and covers the lender up to the amount of the mortgage for certain title issues. An owner’s policy may be purchased by an owner and covers the owner for certain title issues generally up to the amount of the purchase price. While the lender may require the owner to purchase title insurance on the lender’s behalf, owner’s coverage is voluntary on the part of the buyer.
Doesn’t the title company perform a title search before the closing? Why would I need to have title insurance?
A title search establishes the conditions that must be met before a title insurance policy is issued and also provides information on current ownership and encumbrances affecting the property. The search involves research into the records of the county auditor, recorder, clerk of courts and probate court and may also involve searches of the sheriff’s records and federal records such as bankruptcy. A title insurance policy protects the insured against title defects, liens and encumbrances existing as of the date of the policy which are not excepted from coverage. For example, a lender’s policy will insure that the lender’s mortgage is the first and best lien on the property. It will insure the lender in the event of fraudulent or improperly signed deeds, unpaid taxes, or any undisclosed hazard or risk that is not revealed by the recording system.
My lender is asking me to buy a lender’s policy for the loan? Does that cover me?
It is important to understand that a lender’s policy of title insurance does not protect the buyer—only the lender. The coverage for the lender decreases as the loan is paid down and once the loan is paid off, the lender’s insurance is no longer in effect.
That is why many homeowners choose to purchase an owner’s policy of title insurance. This policy protects the home buyers even after they sell the property.
Owner’s title insurance usually guarantees that the insurer will pay any legal fees for defending against challenges to the title and will pay any valid claims. Even if an attorney has performed a title examination for your buyer and has assumed liability for the work, an owner’s title insurance policy could be a good idea. An independent attorney’s liability is limited to negligence and does not include responsibility for hidden title problems.
How much does it cost for title insurance?
Owner’s title insurance is a one-time fee, paid at the time of purchase and can usually be included in the closing costs. Ask your REALTOR® to direct you to the proper closing agent to assist you in the purchase of owner’s title insurance. Most agents can recommend a list of reputable, experienced insurers. In Ohio, the price of title insurance is set by the Department of Insurance. However, there are different levels of coverage, so you will want to ask about the benefits of each level and determine which is best for your situation.
I’ve heard about a homeowner’s policy. Does that provide more coverage than a regular owner’s policy? Does it cost more?
In the late 1990′s, most national underwriters began offering expanded coverage policies for residential homeowners and lenders. For an additional premium, the ALTA Homeowner’s Policy provides coverage against losses from zoning violations, subdivision law violations, improvements that encroach into an easement, building permit violations, violations of covenants, conditions and restrictions, lack of vehicular and pedestrian access, supplemental assessments arising as a result of construction or transfer prior to the policy date and damage to the home caused by someone with easement rights.
The expanded policies are unique since they take on risks that cannot be eliminated or minimized by a thorough search of the public records or by a careful inspection of the property. They provide for certain post-policy coverage such as a fraudulent deed executed after the insured acquires title to the property. They set caps and deductibles for several of the new coverages. Additionally, the expanded policies provide for a continuation of coverage for insureds who transfer the property to their intervivos trust. Absent a continuation as a result of warranties of title or the purchase of an endorsement, if available, and prior to the expanded policy, coverage was lost if an insured transferred title to his/her intervivos trust because the transfer was not due to an “operation of law”.
The expanded coverage also provides for a ten percent increase in coverage value during the first five years and up to 150% of the initial policy amount to cover increases in value due to inflation. The increases are not tied to actual inflation rates and do not require that the property increase in value over the five-year period.
If a lender’s policy and owner’s or homeowner’s policy are all desired for one transaction, does that mean that there are double premiums and overlapping coverage? How are the premiums determined?
The costs for title insurance are set by the state. If a lender’s policy of title insurance is the only insurance purchased for the transaction, it will insure the lender and will be based on the amount of the loan. If an owner’s policy of title insurance is purchased, it is typically based on the purchase price of the real estate. In the event both policies are purchased (simultaneous issue), the cost for the lender’s policy is reduced substantially (see hypothetical computation below).
HYPOTHETICAL COMPUTATION FOR TRANSACTIONS
Based upon the indicated hypothetical rates below, if you are buying a home for $100,000 and are borrowing $75,000, the cost for each policy, without the other, is as follows:
- The $100,000 Owner’s Policy at $5.75 per $1,000 is … … $575.00
- The $75,000 Lender’s Policy at $3.50 per $1,000 is … … $262.50
- The cost for independently purchasing both policies is … … $837.50
However, if you purchase both policies at the same time (simultaneous issue), the cost for the Lender’s Policy is reduced to only $100.00; just add this $100.00 to the cost of the Owner’s Policy ($575.00); both policies will then cost … … $675.00.
Your total savings by purchasing both policies is … … $162.50
FROM THE OHIO TITLE INSURANCE RATING BUREAU, INC.
PR1-AN ORIGINAL TITLE INSURANCE RATE FOR OWNER’S OR LEASEHOLD OWNER’S POLICIES: An Owner’s Policy insuring fee simple estate will not be issued for less than the insured’s interest in the full value of the land. An Owner’s Policy, endorsed to insure a leasehold estate, will not be issued for less than the full value of the leasehold estate.
PR-6 RATE FOR SIMULTANEOUS ISSUANCE OF OWNERS AND LOAN POLICIES: When simultaneous issue of Owner’s and Loan Policies covering identical land are issued, the combined rate for the simultaneously issued policies shall be the applicable Owners Rate plus $100 for each Loan Policy issued, provided that the Loan Policy (or if more than one Loan Policy is issued, then the aggregate amount of the Loan Policies) does not insure in an amount in excess of the Owner’s Policy.