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Source of Title Blog

Who Should Pay For The Owner's Policy?
by Robert Franco | 2010/01/18 |

There are certainly variations in custom from state to state, and even county to county.  In some locations, the seller is required to furnish an owner's policy to the buyer, in others the buyer pays for it if owner's coverage is desired.  I have always wondered about this difference and I thought it would be worth taking a closer look to see which makes more sense.  Add a comment and let us know what the custom is in your area and what you think about it.

Source of Title Blog ::

The best way to determine local custom is to examine the standard real estate purchase agreements used by the local boards of Realtors.  For this blog, I'll quote from the sales contract commonly used in my home county, Richland county, and the one used 60 miles south of here in Franklin county.

The first thing to consider is the requirement in both contracts that the seller convey to the buyer marketable title.  Both require a Warranty Deed.

Richland county:

Seller shall... convey marketable title by a transferable and recordable General/Fiduciary Warranty Deed to Real Estate in fee simple absolute with release of dower.

Franklin county:

The Seller shall convey to Buyer marketable title in fee simple by transferable and recordable general warranty deed, with release of dower, if any, or fiduciary deed, as appropriate, free and clear of all liens and encumbrances not excepted by this contract...

In this regard, both contracts are remarkably similar.  Just to be clear, let's examine what it means to convey marketable title and what warranties are included in a general warranty deed.

According to the Ohio Revised Code, marketable record title means a title of record, being an unbroken chain of title for forty years or more, which operates to extinguish such interests and claims existing prior to the effective date of the root of title, subject to certain exceptions defined in Ohio's Marketable Title Act (MTA).  The MTA allows for certain interests to be preserved by the filing of a notice and certain other interests are not extinguished by the Act, such as easements for railroad or public utility purposes; easements which are clearly observable; any right, title, or interest in coal; certain mortgages; and any right, title, or interest of the government.

Ohio courts have held that the "title need not be free of any possible claim of defect in order to be marketable, but it must be in a condition as would satisfy a buyer of ordinary prudence."  However, "it should appear reasonably certain that the title will not be called in question in the future, so as to subject the purchaser to the hazard of litigation."

Some believe that because title insurance insures marketable title that the availability of title insurance, without exception to any objectionable matter, is evidence of marketable title.  After all, the title company would not be willing to write such a policy if the title were not marketable.  However, Ohio courts have said that "a purchaser cannot be compelled to accept insurance as a substitute for good and marketable title provided for by contract."

By statute in Ohio, the words “general warranty covenants” have the full force, meaning, and effect of the following words: “The grantor covenants with the grantee, his heirs, assigns, and successors, that he is lawfully seized in fee simple of the granted premises; that they are free from all encumbrances; that he has good right to sell and convey the same, and that he does warrant and will defend the same to the grantee and his heirs, assigns, and successors, forever, against the lawful claims and demands of all persons.”  If it later turns out that there is a defect in the title conveyed, the purchaser can hold the seller liable for breach of the warranties of title.

Now that we know what it means to convey marketable title by general warranty deed, let's examine the role of title insurance and try to determine who it protects and who should pay for it.  But first let's take a look at the purchase agreements for Richland and Franklin counties.

Richland county:

If a title search or title insurance is required, Purchaser shall procure same at Purchaser's expense.

Franklin county:

The Seller shall furnish and pay for an owner's title insurance commitment and policy in the amount of the purchase price.

The theory in Richland county seems to be that title insurance protects the owner and it is up to the purchaser to pay for his policy if he wants the coverage. Of course, title insurance is often viewed as an unnecessary expense, and sometimes as a "rip-off."  Much more often than not, in Richland county buyers do not opt for title insurance.  As a practical matter, buyers buy as much home, or sometimes more, than they can afford.  They need every dime they can muster to complete their purchase.  Thus, owner's policies are rare in Richland county.

I have even heard Realtors say "you don't need title insurance because the bank is getting a policy."  Clearly, not all Realtors understand title insurance, marketable title, or warranties of title.

The view in Franklin county seems to recognize that both buyers and sellers are better off when everyone is covered by title insurance.  Is this the better approach?

An owner's policy of title insurance insures, among other things, that the title is marketable.  It covers the owner for as long as he holds an interest in the real estate or so long as the seller may have liability by reason of warranties in any transfer or conveyance of the title.  And, it not only covers the claim, but also the costs, attorney's fees, and expenses incurred in the defense of any covered claim.

Thus, in Franklin county, if a defect in the title is discovered after conveyance, the buyer has an owner's policy which should protect his interest.  It would most likely be unnecessary to sue the seller under the warranties of title.  By providing a title policy to the buyer, the seller has protected himself from a potential lawsuit.  In the event that the claim is not covered under the buyer's policy, the seller has a policy that will defend him in the event of a claim for breach of the warranties of title.

By contrast, in Richland county the buyer who did not get a policy is left with the sole remedy of suing the seller.  Most likely the seller did not have an owner's policy either, leaving him liable for his own defense costs and any eventual judgment which may be rendered.

Regardless of who pays for the policy, the Richland county contract is seriously flawed.  Seller's agents are doing a disservice to sellers in this county with such a contract.  Why?  Because it requires sellers to convey title by general warranty deed, leaving them liable for potential breach of warranty claims, and by not requiring any title insurance on the transaction.  It is completely up to the purchaser to decide whether or not to purchase a policy, which most often means no policy will be issued. 

As an attorney, I could never advise a seller to sign the Richland county contract.  I recently drafted a sales contract for a seller and I did not use the standard board of Realtors contract as a guide.  Instead, I required the buyer to purchase an owner's policy or, at the very least, an attorney's opinion of title.  If the seller does not want to pay for an owner's policy, I would have to advise my client to convey title by quit-claim deed and offer no warranties of title on the transfer.

I believe that the reason buyers are not required to pay for their own title insurance policy, under either contract, is because it drives up the buyer's costs of closing and makes it more difficult to sell homes.  That is understandable, but forgoing title insurance is not in the best interest of the buyer or the seller.  Thus, the Franklin county custom seems to be much more favorable.

In Franklin county, where the seller must pay for the buyer's policy, it is acceptable to bother buyer and seller because it costs the buyer nothing for the coverage, and the seller was furnished with a policy when he purchased the property so it seems fair that he do the same for his buyer. 

Of course, changing the Richland county contract at this stage would be problematic.  Sellers would most likely object because nobody paid for their policy when they purchased the home.  But, in the long run, making the change would better protect homeowners in the county.

As always, I'm interested in your thoughts.  What is the custom where you are?  What do you think the most beneficial approach is when it comes to protecting the parties, and who should pay for the policy?

Robert A. Franco
SOURCE OF TITLE




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Categories: Attorneys, Consumer Advocacy, Realtors, Title Industry

2089 words | 15060 views | 6 comments | log in or register to post a comment


Edward

I just read a Realtor's contract addendum that states: " PURCHASER'S AND SELLER'S ACKNOWLEDGE THAT UNDER U.S. CODE 12 , CHAPTER 27, SECTION 2608 (RESPA) PURCHASER'S HAS THE RIGHT TO SELECT ANY TITLE COMPANY OR CLOSING SERVICE PROVIDER TO FURNISH THE TITLE EVIDENCE AND CLOSING SERVICES REQUIRED BY THIS AGREEMENT"

FYI , the cost (per the above contract) is to split the cost of the owner's policy. The above statement is basically a half-truth unless you add: '' PROVIDED THE PURCHASER PAYS 100% OF THE TITLE EVIDENCE"  to be totally correct.  However, many sellers and  listing Realtors think that because of the Respa references this statement must be true .

According to the above Respa rule the Seller can't  "require" the Purchaser to "purchase" title evidence from a particular title company as a condition of the sale. Apparantly the above Realtor interprets this to mean that as a result of this rule against the Seller , the Purchaser can therefore "require" the Seller to pay all or part of the title evidence from a pre-determined title company(Realtor-Owned) as a Purchaser condition of the sale. Misleading ? Unfair?

 
by edward hartung | 2010/01/18 | log in or register to post a reply

Owner's Policy purchase

Here in Texas usually the Seller is charged with the purchase of the Owner's Policy.  However, if the Purchaser does not want it (an unwise choice), there is no charge for the policy.  In most cases both parties agree to split the cost of the premium and/or a percentage agreement sometimes are done. 

 
by David Keeling | 2010/01/25 | log in or register to post a reply

Who Should Pay For The Owner's Policy?

 

Robert,
 
I have always found this to be an interesting subject. I have been in the Title Insurance business in Illinois since the early 80’s. In Illinois the seller is required to provide a title insurance policy as evidence of clear title at the closing. Does it make sense that the seller provides evidence of clear title to the buyer even though the buyer ultimately reaps the benefit of the title insurance policy? Here in Illinois most people hire an attorney to represent them during the closing transaction. The attorney then suggests that a Title Insurance policy is procured. I believe this to be a very good decision but….. My problem is that most attorneys in Illinois write their own Title Insurance. Hence when the seller obtains council the attorney suggests writing the Title Insurance policy thru his own company. This is where I get confused. Who ultimately is protected by the insurance policy? The buyer or the seller. I believe it is the buyer, but then wouldn’t it be a conflict of interest for the sellers attorney to produce the insurance policy? I have had this discussion with several attorneys who all defend their actions. Of course they would. They are making a lot of money selling insurance to their clients. Some people say “what does it matter”. The Attorney is providing an insurance policy so everyone is covered. But I have a friend whom it did matter to. There was an omission from his insurance policy that ultimately affected him. He was planning to put an addition on the home after he purchased it but an easement was missed on the policy which made it impossible. When he contacted the attorney who provided the policy the simple answer was “sorry sue me”. Apparently since the undisclosed easement did not affect Title as the property stands there was no loss incurred. According to my friend all parties knew of his plans for the addition. So the question in my head is did the attorney have knowledge of the easement but ignored it in order to get his clients property sold? If the seller’s attorney is providing the insurance who is he representing? The seller? The buyer? Himself?
 
In my opinion I think the buyer should have control over who the Title Insurance provider is and that the costs are shared since the insurance provides some measure of protection to both parties.
 
But we all know that opinions are like……everyone has one!
 
David Vogeler
Abstract Title Consultants
 
by DAVID VOGELER | 2010/01/25 | log in or register to post a reply

I believe that the policy protects the seller, too.

If there is a title defect and the seller conveyed title by a warranty deed, he could be sued by the buyer on those warranties.  As an attorney representing the seller, I would he hesitant to advise my client to sign a warranty deed if the buyer is not getting a title insurance policy.  And, just in case the claim is not covered, I would hope that the seller also got a policy paid for by the previous owner that would defend him against a claim on the warranties.

Thus, the seller is not an insured on the buyers title policy, but it gives the buyer another source to recover from without having to sue the seller on the warranties of title.

As for your example... I am surprised that the missed easement was not a covered claim on the policy.  I'm not sure what happened there.

Best,
Robert A. Franco
SOURCE OF TITLE

 

 

 
by Robert Franco | 2010/01/25 | log in or register to post a reply

IL transplant to NJ

David clearly is from the Chicago area, cos out in the sticks, most closings are done by the title agencies and rarely have attorneys involved or attending since 99% of the County Bar Associations have had direct input into creating their local Board of Realtors' Sale Contract document and give it their blessing by saying, "just fill in the blanks and don't illegally practice law". (No opinion on the matter, just the facts)

Anyway - coming from IL to NJ, where the buyer pays up the nose for everything, I have always thought it fair that the Seller pay for the property, municipal and their lien/judgment search (if not filed and recorded at the same place) since it IS the Seller's burden of proof as to good, marketable title.

Before I became a title geek, I was a Realtor, and when I listed my houses, I would encourage the Seller to obtain a current owner search if they had back title and in the cases where they inherited the farm from mom and pop, to do a 20 year search (normal in IL vs 60 year in NJ) since typically no title insurance was ever issued in those cases.

I did this so a) the owner would know exactly condition of title and there would be no surprises when it came to close or if there were issues, they could be addressed before an offer would come in and b) so all potential buyers would know the title was clear.

As to the insurance premium, that is as negotiable as any other non-reoccuring fee that can be part of the offer to purchase (Sales Contract).

I don't think there is a right or wrong way to decide, as in any contract, it is a simple meeting of the minds as to who agrees to pay for what.

As to the question of attorney representation for a seller/buyer and also being the title agency?  It goes back to the "arm length transaction".  In our IL neck of the woods, if the seller had an attorney for legal representation , that same attorney could not have been title agent, issuing insuance and handling funds,    I can't speak for Cook County (whole different animal there), But our Underwriters insisted on it and only issued the CLP/CSL to an agency, never a 3rd party attorney.  At least that is how it was when I migrated in 1998. 

I am in complete ageement that an attorney providing legal representation to a client and also providing the title insurance (to the same transaction) may have conflicts of interest because that attorney is trying to represent 2 clients in one transaction - the buyer/seller and the Underwriter.

There, I said it !

 
by Victoria Moate | 2010/02/22 | log in or register to post a reply

Title Insurance in the wild, wild west...

Seems most of you are hailing from the mid-west or eastern U.S. - so thought I would contribute from the west.

We don't have "attorney issued title insurance" out here, thank goodness.  There, I said it.

However, in most western states the seller pays for the owner's title insurance policy issued to the Buyer.  In Arizona, where I hail from, we do use a Warranty Deed for conveyances, in most cases.  The Buyer is supposed to have the choice of title insurer and therefor escrow holder (per RESPA regulations cited in Edward's reply below), however, as we all know in the new REO and Short Sale markets, this is no longer the case.  Buyers are being "forced" to use the seller's choice of title companies.  The buyer can choose to use their choice of title companies, however, then the buyer would be responsible for paying all closing costs that the seller would normally pay.  Not really giving the buyer a "choice".

Now, to complicate matters further, especially in states where the seller normally pays for the owners policy (which in fact does protect seller from buyer lawsuit later, and therefore does benefit the seller) the new RESPA regs for the preparation of the new HUD-1 settlement statement, require that title insurance premium for the owner's policy be charged to the buyer in the 1100 section, and then a credit back to buyer from seller on the first page in section 200.  This is so bizaar - who came up with these new regs for the HUD-1 anyway?? Obviously no one who has experience in this industry!!

Well, this is my story, and I'm stickin' to it!

 

 
by KATHLEEN COOPER | 2010/03/01 | 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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