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Source of Title Blog

Who Should Pay For The Owner's Policy?
by Robert Franco | 2008/04/15 |

I had an interesting discussion with a friend and colleague regarding the differences in local custom regarding who pays for the owner's policy of title insurance. Around here, it is customary for the buyer to pay for his policy, if he wants one. A little further south, it is customary for the seller to provide an owner's policy to the buyer. These differences have become a part of the standard sales contracts used by the boards of Realtors. I have even heard that in some areas, the title premium for the owner's policy is split between the buyer and seller. With the variances in local customs, I thought it would make for an interesting discussion - what is the custom in your area and which makes the most sense?

Source of Title Blog ::


BUYER PAYS

They buyer pays system seems to be geared around the belief that if the buyer wants the coverage they should have to pay for it. The problem seems to be that nobody wants to pay for something at a closing that is "optional." Furthermore, the Realtors have even been known to tell people that the title company will make sure that the buyer has good title - they have to do that for the lender anyway. The argument (myth)is that if the title company does their job properly, you don't need title insurance.

Not surprisingly, we don't sell many owner's policies when the custom is for the buyer to pay for the coverage "if he wants it." Many homebuyers stretch themselves pretty thin on a home purchase - they buy the most home they can afford - and they would rather save a few hundred dollars at closing.

Changing the custom at this point would be very problematic. The seller didn't get a policy from their grantor, so they don't want to pay for one for their buyer.

If a problem surfaces, and no owner's policy was issued, the owners only recourse would likely be to sue the seller on the warranties of title. Of course, the practical problems that arise may be the cost of filing suit, locating the seller, and the seller's limited funds to take care of it.

SELLER PAYS

Typically the seller is required to deliver a General Warranty Deed to the buyer. This means that if the seller passes defective title to the buyer he is liable under the warranties. One way for the seller to be sure that he conveys good title is for him to pay for a title search and an owner's policy for the buyer. If a title problem is later discovered, the owner can make a claim on his policy rather than try to sue the seller under the warranties of title.

This seems to be what was intended by the title industry. The reissue rate even provides for a discount when the seller buys the next owner's policy for the new buyer. When the custom is for the buyer to pay for his own policy, the reissue rate is pretty much useless. First of all, most homeowners don't have an owner's policy. Second, even if they did purchase an owner's policy, they have no need for a reissue rate if they aren't providing a policy to their buyer.

WHICH IS BETTER?

The better custom depends on your view of what is most important. If you believe that it is more important to keep transaction costs at a minimum than to have more homeowners covered by title insurance, than it makes more sense to have a buyer-pays custom. The public has an impression that title insurance is over-priced and unnecessary. The media is always quick to report that title claims are rare; they often cite to the fact that only about 5% of the premiums go to pay claims. The industry response is that unlike casualty insurance, the premiums from title insurance are spent on the "extensive process" of searching the title and clearing title problems before the policy is issued. However, the agent must do this when issuing a loan policy for the lender, so many wonder why it's necessary to pay the additional premium for the owner's coverage.

Clearly this view is pervasive. ALTA reported in 2004 that 48.8 million homeowners, an estimated 40 percent of U.S. homeowners don't have an owner's policy of title insurance. Some experts even advise against purchasing owner's policies. Earlier this year, J. Robert Hunter, insurance director for the Consumer Federation of America, said that title insurance is "not a good economic risk" (see Just Don't Buy It).

If, on the other hand, you believe that it is more important for people to have the coverage that owner's policies provide, especially in light of the simultaneous issue rate, then it makes must more sense to have a seller-pays custom. This not only protects the new owner, but it also provides some peace of mind to the seller who won't have to worry about being sued on the warranties of title if something should crop up later.

There does seem to be a disconnect between the warranties of title and the optional title insurance in the buyer-pays system. If there is not going to be an owner's policy issued, the seller should consider changing the contract to require only a Limited Warranty Deed. If the buyer decides he is willing to assume the risk and forego an owner's policy, the seller should think twice before putting himself on the hook with a General Warranty Deed. I think it is interesting that some people wouldn't think twice about not getting an owner's policy, yet they would most likely be very put-off by a seller refusing to offer warranties of title.

SOUND OFF!

What do you think? What is the custom in your area and do you think it makes sense? Which would you prefer if you were the buyer or seller, and how would you advise your friends and clients?

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com



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Categories: Risk, Liability and Claims, Title Industry

1316 words | 24315 views | 8 comments | log in or register to post a comment


I am on the side of the seller payi...
I am on the side of the seller paying. I believe it comes under the responsibility they have to disclose any and all issues on the property to the buyer. Then paying for the insurance is in my opinion a bargain. I say this because of the claims I do see. They are usually not anything a former seller would be happy to be drawn in to court over.  
by Greg Knowles | 2008/04/16 | log in or register to post a reply

Being in Central Ohio we issue Owne...
Being in Central Ohio we issue Owner's Policies paid for by the Seller. It seems only fair that the Seller should provide this protection. I too have had numerous Realtors advise their clients that Title Insurance is not worth the premium one pays. Until you have a claim, which the Officer that finger printed me for my title exam found out about. He questioned me about several things and then followed up with "I always thought that insurance was a scam until I needed it." Thankfully he is in Delaware County, Ohio and it was mandatory per the purchase contract. Otherwise, he would have been out of $50K on a missed second mortgage that never got paid off.

On another note, how many times have you made a claim on your Homeowners Insurance (i.e. storm damage, fire, injury - St Farm/Nationwide etc.)?? Yet you pay out the nose annually for something you hardly ever use. At least Title Insurance is a one time fee paid for at the time of closing!!

I also have heard the "well the Lender is getting a policy so you really don't need one". That boils my blood because what they fail to explain is that the Lender's Policy only covers the Lender. It in no way provides protection to the Buyer. Shame on those agents! I am sure when one or two homeowners have a claim and don't have insurance said homeowner will cry to the agent and possibly sue. As we know, Realtors tread in the unathorized practice of law on a daily basis. Maybe when they pay enough for bad advice they will come to see it is well worth the cost at closing.

And then, and then, I could go on forever!!!
 
by Clanci Nelson | 2008/04/17 | log in or register to post a reply

Now that consumer focus is shifting...
Now that consumer focus is shifting to shopping for title insurance and settlement services, I would prefer that the buyer make the purchase. They, afterall, must live with the consequences of the choice.

We all know there is a difference in search and examination and claim processing.

A seller is motivated to select the cheapest and the one most likely to do a less than adequate search. In other words, make the deal close.
 
by Diane Cipa | 2008/04/17 | log in or register to post a reply

In the Chicago area, the seller typ...
In the Chicago area, the seller typically pays for the owner's policy for the benefit of the buyer. I think it is a logical way to assure the warranties offered in the deed.

From a marketing perspective, when does a title agent have the opportunity to explain the benefits of an owners policy to a buyer who has not researched the topic on his/her own? I suppose we could throw in a pamphlet with the stack of papers that few seem to ever read.

While Diane suggests that the focus is shifting to direct consumer marketing, I can't help but wonder if that is more blogosphere banter than reality. Not that it's not a good idea, but I don't think that many buyers will seek out the information.

In the Chicago area, the seller's attorney generally orders title and everyone goes along with the choice. Many of the attorneys are now agents anyways, and they would have the opportunity to sell their own title insurance. But, I can't see many of them spending much time advising the buyer to shop around for the best-quality research. They will sell their own insurance product with the research that their underwriter provided to them.

In a refinance situation, I think that direct marketing can be effective. The borrower is required to purchase the insurance anyway. But, again, selling quality is going to lose over price.

This is a good subject for discussion, and I hope you get lots of replies, Robert.
 
by Pat Scott | 2008/04/17 | log in or register to post a reply

I tend to agree that when the selle...
I tend to agree that when the seller is required to convey title with general warranties is in the seller's best interest too, to make sure there is an owner's policy issued. I have seen a few sales contracts that do require an owner's policy at the buyer's expense. I still prefer the custom of having the seller pay for it, though. I think that makes more sense all around.

Diane makes a good point about the push for the consumers to "shop" for title services. I haven't seen any evidence that it is happening around here. I think the popularity of AfBAs actually discourages the Realtors and lenders from advising the consumer to shop around.

In any regard, I think the custom I would like to see is that the seller is required to provide the seller with the policy and since they are paying for it they should direct the order to the title company of their choice. If that choice is unacceptable to they buyer, they should have the right to choose a different title company if they are willing to pay for it themselves. But, the buyer should not be able to exercise that option then decide they don't want the coverage - the seller has an interest in the policy being issued as well.

Let's see some more comments from some other areas of the country.
 
by Robert Franco | 2008/04/18 | log in or register to post a reply

Here in Pennsylvania, I personally ...
Here in Pennsylvania, I personally have not seen a deal where the seller pays for the Owner's Policy. Pennsylvania uses the "simultaneous issue" rule. That means, when an Owner's and a Lender's Policy are going to be issued simultaneously, it is treated as one policy. You base the rate off of the higher coverage amount, which is pretty much always the Owner's policy amount. I think that would get kinda hairy because a seller may feel as though they are paying for the Lender's policy when they really are not, there is no charge for the Lender's policy in this case. Has anyone in PA had a deal where the seller paid the title premium? I would love to know if that has happened in PA.

To speak on the point of the consumer choosing their title company, in PA, it is completely up to the consumer to pick their title company. However, so many of the local realty companies have their own in house mortgage brokers and in house title companies and they tend to impress those services on the consumer. I had a deal that closed last week. The buyer was a personal acquaintance of mine. They told their realtor that they had a title company they wanted to use. The realtor (who shall remain nameless) tried and tried and tried to get them to use their title company. In fact, up until the day of the closing, the realtor was calling me everyday just hoping that we would make a mistake and then his title company could be the savior. To look at it from the consumer's perspective, I am willing to bet that most don't feel like putting up the fight and that is unfortunate.
 
by Mike Figurski | 2008/04/19 | log in or register to post a reply

That is interesting, Mike. We have...
That is interesting, Mike. We have a simultaneous issue rate in Ohio, too. When there is an owner's policy, the loan policy is only $100. So, when the seller pays for the owner's policy the buyer still pays $100 for the loan policy. 
by Robert Franco | 2008/04/19 | log in or register to post a reply

Like Mike in PA

I haven't seen the seller pay for an owners policy either in PA..... but let me verify records.

 
by Rob Robinson | 2008/04/21 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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