Whether you’re investing in commercial or residential real estate, once you get past the agreement phase, part of your due diligence includes a title search and insurance. In Pennsylvania, unless you are purchasing a property in cash, title insurance is required and always recommended. Learn more about the importance of title insurance and how it protects you now and in the future.
What is title insurance?
When seeking to purchase or take legal ownership of a property, you are essentially acquiring the rights to the land and any structures on it via a “title.” In real estate, “title” to a property is usually transferred through a deed.
To help ensure there are no liens or claims that affect the buyer’s use or enjoyment of the real estate, a title search is conducted by a title company. Within the search, the title company reviews public records such as deeds, mortgages, court judgments, tax records, estate documents, and divorce decrees, disclosing important things impacting the property’s future use, such as utility easements or deed restrictions, like adding a pool at a residence or in certain commercial adaptive reuse projects.
Amidst this process, title insurance is designed to safeguard this ownership by providing protection against potential issues that may arise with the property’s title now or down the road, protecting both buyer and lender (if a property loan or mortgage is extended) from financial loss sustained from defects in a title to a property.
There are two types of title insurance policies:
- A lender’s policy – if you are buying a property using a mortgage, your bank will require you to purchase a title insurance policy, providing them coverage for title defects impacting their lien.
- An owner’s policy – the buyer also has the option to purchase an “owner’s policy,” which provides them with individual insurance, as the lender’s policy only protects the bank. Under Pennsylvania law, you are not required to purchase an owner’s policy, although most real estate professionals would strongly recommend that you do so.
While title insurance is required, the buyer has the right to select their own title agent or agency. Builders, realtors, or banks cannot require you to use a specific title company.
What does title insurance cover?
If the title search finds certain issues, the title company will attempt to fix them before the closing. In Pennsylvania, which is an all-inclusive rate state, your title insurance covers:
- the search and examination of land records
- closing escrow and settlement services
- the title insurance company’s assumption of the insurance risk via the title insurance policy
Residential real estate attorneys may serve as licensed title agents or employ one in their firm. Regardless of where you receive title insurance, the cost is the same across the Commonwealth, as per the Pennsylvania Department of Insurance. Unlike other types of insurance (auto or property insurance), there are no monthly or annual premiums for title insurance – the buyer pays one “premium” or one-time lump sum at the time of the closing.
Some of the most common issues uncovered by title agents or agencies include:
- Conflicting wills or missing heirs
- Errors in public records
- Old tax claims
- Child support liens
- Unpaid contractor bills
- Unpaid condominium or association assessments
- Outstanding judgments
In commercial real estate transactions, i.e., when you buy real estate from a corporation or an LLC, title insurance will also provide coverage, making sure that the people signing the documents have the legal authority to do so. Sometimes, you may need to buy additional “endorsements,” special coverage issued by the title company. These are most often required by banks for things like condominiums or surveys.
Title insurance aims to shield residential and commercial property owners from financial loss due to these unforeseen problems. Without it, buyers risk inheriting the debts or legal complications, like the ones noted above, associated with the property’s past.
What isn’t covered by title insurance?
Title insurance policies have specific “exceptions” to be listed within the policy period. These are things that are not covered by the title insurance policy. Exceptions will include any publicly recorded easements or deed restrictions at the time of purchase, such as:
- If, 30 years ago, a prior property owner recorded a deed restriction saying that no above-ground pools are permitted to be built on the property, that deed restriction would be listed as an exception. In the future, if you filed a claim under the insurance policy because you cannot build a pool, you would have no coverage because it was a listed “exception” in the policy.
- A prior property owner signed and recorded a utility easement allowing a utility company to install above-ground wires through the property fifteen years prior. Without knowing any better, the current owner builds a shed within the area reserved for the utility lines. The utility company tears down the shed when installing the utility lines. The current property owner would not have coverage because the easement was an “exception” listed within the policy.
A title company’s job is to make sure that the title is “insurable.” A real estate attorney’s job is to go beyond that and make sure that there are no issues impacting your use of the property.
Reviewing the exceptions to an insurance policy is one of the best values an experienced real estate attorney can bring to a transaction. The title insurance policy is typically issued after the closing, offering ongoing protection to the property owner.
Legal support real estate transactions and title issues
Despite the protective measures offered by title insurance, challenges and disputes can still arise. In such cases, a real estate attorney may enlist the support of litigation services to resolve any title issues.
Attorneys in our Real Estate, Land Use & Development team are here to help you navigate your residential and commercial transactions. Whether you’re the buyer or seller or have questions about your unique situation, please reach out to us.