Most insurance lines are based on unknown individual event liabilities – that is, it is not known where a claim will occur or when. No one can predict with certainty, where a hurricane will hit or when or how destructive it might be; no one can predict who will get what disease and what it might cost to treat it. Insurance is based on average claims in the past, projected into the future.
Title insurance is different – the liability for every insured home is known in advance of the insurance policy being written. The base of the American land recording system is that all “events” that affect a piece of property are publicly disclosed by means of the recordation of a document at the County Recorder’s office. The County Recorders are required to give “constructive notice” of all actions related to all properties in their counties. Every change in property ownership is recorded; all liens are recorded; every mortgage is recorded; notices are recorded; judgments are recorded; easements are recorded; anything that affects a property is recorded in the public record system, which is maintained by the County Recorders office and made available to the “public”–generally, at no cost.
If all risks are known in advance, why does the title insurance industry have claims ratios ranging between 4% and 12% of premiums?
Claims usually occur due to errors in the title plants or errors in searching and examination of the documents. Claims also occur due to fraud and other reasons.
This blog explores some of the sources of claims and some types of claims.
The Source of Some Types of Claims:
This may be due to an oversight on the part of the searcher or the lien may have been incorrectly posted in the title plant (e.g. a missed legal from a lien document having multiple legal descriptions).
Mortgage – Line of credit:
The original borrower’s sign-off is required to authorize a lender to close a line of credit account. There have been instances where the title company failed to send in the authorization form to the lender to close the account and sometimes, the lenders have not promptly submitted the authority to the title company. Sometimes, borrowers have taken advantage of this oversight or delay in closing the line of credit.
A line of credit is generally paid off by a new mortgage. If an unscrupulous borrower finds out that the line of credit is still active, they may borrow against it. Since the collapse of the mortgage industry, some lenders found that their lien was not in first position when they attempted to foreclose on the owner: there was a prior debt from an unclosed line of credit. This has resulted in title insurance claims.
Lien(s) attach when tenancy is broken:
A lien does not attach to property held as tenants by the entirety (husband and wife) if the lien is against just one of the parties. Once tenancy is broken, often due to a divorce, the lien will attach to the property.
One scenario: A title company will prepare a commitment for a sale. The title company may not be aware that the sale is due to the owners’ pending divorce, and will not show the lien. During the course of the closing, the owners’ divorce is finalized. The title company records the deed, unaware of the divorce, and the property is transferred to the new owners with the lien attached. The lien may not be discovered until a new search is done on the property or the lien holder pursues collection.
Interest of all owners not conveyed:
This is rare but happens when various owners are involved or interests are conveyed by a quitclaim deed that does not always promise good title. Probate or a quiet title action may be required. A quitclaim deed that shows up in a title chain should be a red flag to the searcher.
Lack of or no access:
Although a property owner may have gained access to and from his property for many years by a roadway easement, the easement may be invalid if the owner was not legally granted access. This is usually discovered in a survey by the adjoining property owner attempting to sell or develop the land.
A claim to resolve this type of issue can be costly. The end result may not be favorable to the owner of the property that used the unrecorded easement, especially if it is determined that the property is landlocked without that roadway.
Encroachments are usually discovered during a survey or appraisal. Depending on the type and extent of the encroachment, an agreement between the parties affected by the encroachment can remedy the issue. The terms of an encroachment agreement should be reviewed by the searcher to verify that it will carry over to the new owner. Encroachments become a problem when properties change hands and the encroachment agreement between prior owners is no longer valid. Other problems may occur when the landowner seeks adverse possession of the land he is encroaching.
Invalid, missing or expired Power of Attorney:
A claim on the validity of a person signing on behalf of another, by way of a power of attorney, is infrequent. There have been instances where the power of attorney may have expired, or the terms of the power of attorney were for a specific purpose and may invalidate the document that was signed, if it was not for that purpose.
Hidden hazards; fraud, forgeries:
These hard to detect circumstances almost always result in a claim.
Read Part 3.
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