Is Title Insurance Really Worth the Cost?
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:†
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
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.
If you would like to learn more about what title insurance covers, or find out what it would cost to purchase title insurance for property in your area, contact your Surety Title representative today.
*Based on combined Form 9 Annual Statements for all insurers within each family, as compiled by the American Land Title Association (ALTA) in the 2017 Title Insurance Industry Data Book.
‡ This premium was calculated based on a $300,000 purchase price of a home located in Wichita, Kansas with no discount for simultaneous issue of a lender’s policy of title insurance. Rates vary by state and you should contact your local Surety Title representative or one of our policy-issuing agents for the cost of title insurance in your area.
† The dollar values listed herein are for illustrative purposes only. The measure of damages and valuation of the property with and without the easement is case specific and may vary depending on state law. The covered risks are subject to the policy conditions, exclusions and exceptions. Surety Title strongly recommends that you obtain guidance and advice from qualified professionals, including attorneys specializing in title insurance, real property, and/or trusts to get more detailed, and current information as to any situation that might impact title to land.