Buying a home is the largest investment most of us will ever make. From purchasing the perfect property, to covering closing costs and furnishing that new home, the expenses add up quickly. When every dollar counts, it can be tempting to decline optional owner’s title insurance – especially when most buyers already have to purchase their lender’s title insurance policy. Why spend more money at closing, when you can deal with an unlikely title problem if one arises?
Let’s find out.
The story below is the first in a series to illustrate how unsuspecting homeowners find their property rights threatened. While these stories are hypothetical, the scenarios are real. Each story is based on common title defects that have prompted nearly 710,000 claims from policyholders across the industry to date.
Part 1: Something Stinks in My Backyard
After an exhaustive search, John purchased his dream home—a two-story Craftsman with a beautiful backyard oasis. A title commitment was issued and he obtained a survey as part of the purchase process. The survey did not reveal anything unusual in the backyard, and the title commitment did not identify any easements affecting the property. John also purchased an owner’s policy of title insurance ($1,115 for a $300,000 home).
A year later, the local sanitation company identified an area in John’s backyard where it planned to run a new sewer line. When John called to object, he was informed that the company has an easement running through his backyard that allows it to move forward without his permission. To make matters worse, John learned that the easement prohibits the installation of the in-ground pool he had planned.
John was furious, and wanted nothing more to do with his “dream home.” Even if he can find a buyer willing to deal with an underground sewer line in the backyard, John is worried he can’t get what he paid for the house, now that the easement lowers its value. Then, John remembered he purchased an owner’s policy of title insurance and took the only recourse he had left: he filed a claim with the underwriter. The title insurer acknowledged that the ancient easement that was not discoverable during the examination was a covered risk under the policy.
As such, it agreed to compensate John for his actual monetary loss, which is the difference between the value of the property with the easement and the value of the property without the
easement.
For illustrative purposes, let’s assume the following facts related to John’s recovery under the owner’s policy of title insurance:
Cost Breakdown
The value of John’s property without the easement: $300K
The value of John’s property with the easement burden: $288K
With an owner’s policy of title insurance:
Covered loss (reduction in value of the property): $12K
TOTAL RECOVERY: $12K
Without coverage:
Loss (reduction in value of the property): -$12K
TOTAL LOSS: -$12K
Thanks to his owner’s policy of title insurance, John plans to use the money he recovered toward a down payment on a new home (and for some boxing lessons to take out his frustration). In this case, and many others, the money that the policyholder recovers from a claim far exceeds the cost of the one-time premium paid for an owner’s policy of title insurance. If John did not obtain this policy, he would not have been protected.
Defining the Title Defect: Ancient or Undiscovered Easements
Many homeowners are shocked to learn they must “share” their property with someone else. Most properties have some form of easement that gives non-owners the legal right to access a defined tract of land for a specific use. Utility easements are fairly common, since utility companies require access to utility lines that service the community.
Easements do not prevent homeowners from using the land, unless it interferes with the easement holder’s use of the property, so it’s important to know how easements can affect you. Typically, easement holders can:
Restrict structures that can be built within the easement area, such as pools, decks, patios, fences, sheds, gazebos and home additions
Remove structures that interfere with the easement holder’s use of the easement area
Trim or remove trees and landscaping within the easement area
Excavate within the easement area
Unfortunately, ancient or undiscoverable easements are a common source of title disputes and claims. Most easements are permanently tied to a property, so each new homeowner is subject to an existing easement, whether they know about it or not. Easements are usually recorded at the time of creation, and should be discoverable in the real property records, but sometimes don’t appear due to:
Improper execution of documents
Clerical errors
Recording of an easement after the title search is conducted
Abandonment of an easement by the easement holder
Protection for Pennies on the Dollar
When you do the math, an owner’s policy of title insurance is quite reasonable. The one-time premium, paid in full at closing, is based on the purchase price of your home and provides coverage for as long as you and your heirs own the property. The longer the property stays in your family, the more affordable your investment becomes over time.
At five years, the daily cost of coverage for a $1,115 owner’s policy (like the one in the story) is about 61 cents per day. At 10 years, the price drops to 31 cents a day. By the time you’ve paid off a 30-year mortgage, just a dime a day ensures your family will never have to worry about significant financial loss due to a covered title defect.
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