SELLERS: BE AWARE OF TITLE INSURANCE WHICH PROTECTS YOUR INTERESTS!
Question: I am the seller in a real estate transaction. I know a title insurance policy will be issued in connection with the transaction, which I have to pay for. Does this also protect me? If not, is there anything I can do about it?
Answer: Great question. Short answer is: absolutely yes!
A detailed discussion of title insurance is beyond the scope of this article. The short version is that title insurance in the typical real estate transaction works like this: when escrow is opened, a preliminary title report is ordered, which reflects the status of title and is supposed to identify all recorded exceptions to title, such as existing mortgages or trust deeds, judgments against the seller, easements encumbering the property, and so on. Closing instructions identify which exceptions are to be removed at title (usually monetary exceptions are paid off at closing), which are to remain, and the vesting deed from the seller to the buyer includes representations that title is being conveyed consistent with the instructions. These representations are then insured by the owner’s policy of title insurance issued to the buyer and paid by the seller.
The transaction closes. Later, a recorded easement is discovered by the buyer which significantly reduces the value of the property. The title insurance company missed it, and has to make a payment to the buyer to cover the reduced value of the property because of the easement. You’re not concerned, because you paid for the title insurance, which protects everyone involved. Unfortunately, you are wrong.
The owner’s policy of title insurance only protects the interests of the buyer, not the seller, even if the seller paid for the premium for the policy. Under the example above, once the title insurance company has made the payment to the buyer, it is subrogated to the rights of the buyer against you (in other words, it steps into the shoes of the buyer), and has the right to make a claim against you to recover the payment made. Why? Because the existence of the undiscovered recorded easement is a breach of the deed given by you to the buyer.
Is there a way this can be prevented? Yes. In the transaction, all that has to happen is for you to request that the seller request that the title insurance company issue, at closing, what is known alternatively as a “seller’s policy” of title insurance, or a “joint protection” policy. All title insurance companies in Oregon are required to issue such a policy.
Basically, such a policy insures the interests of the seller and at its most basic, prevents the type of subrogation claim described above. So, take that same scenario. With a seller’s or joint protection policy in place, once the title insurance company makes the payment to the buyer, that’s the end of it.
There is no claim to be made against you. Peace of mind for you! Note of course that this only goes so far: such a policy will not protect you against claims made which are based upon defects in title which you were aware of and didn’t disclose – coverage won’t apply in such a case. So, in the example, if you knew of the recorded easement, and just did not disclose it to the buyer (and it was missed by the title insurance company), you are still going to be liable for the damages.
You may be thinking: but such an additional policy will cost me additional thousands of dollars. NO! That’s the beauty of this. In Oregon, the premium for the costs of the additional policy of title insurance protecting the seller is a flat $100.00, without regard to the cost of the premium for the owner’s policy you have to pay in any event.
Be aware, ask for the policy which protects you, and obtain peace of mind at a very low cost.