Why the Owner Needs Own Title Insurance – originally published in Business First Magazine and written by Richard W. Rubenstein and Mark McGrady

The context is this:  The client buys commercial property.  A loan is obtained to finance most of the purchase price.  The lender requires the buyer to provide a mortgagee’s title insurance policy to the lender in the amount of the loan.  For some reason (perhaps because the custom in the area is for buyers to provide their own title insurance), the seller is not providing the buyer with an owner’s title policy.

Like most of us, the client is not made of money and he does not like to waste what he has.  The buyer preceives that one way to cut costs is to “go bare” and not buy an owner’s title insurance policy.

The buyer figures that since the title insurance company is insuring the title of the lender, the insurer will have conducted a thorough search of the records in order to protect itself from a claim by the lender.  The title company would not do any additional search to issue an owner’s policy, so the owner is getting as much protection as his mortgagee’s policy to the lender.

So the buyer asks his lawyer:  “Do I really need an owner’s policy anyway?”

There is only one correct answer to this question, and it is a resounding “YES!!”  The reasons for this answer are many.

Recovery under title insurance policies is noncumulative.  That means that if title insurance company has issued a policy to both a lender and an owner and there is a title problem, the title insurer only pays once, not twice.  The title insurer has the right to pay down the mortgage in satisfaction of the owner’s claim.

Since the title insurer only has to pay once, the title company’s risks are usually not appreciably greater if it issues an owner’s policy in addition to the lender’s policy.   Since the risks are not appreciably increased, the cost of both an owner’s policy and a lender’s policy is usually not much greater than the cost of just a lender’s policy.  As Robert Burton (no relation to the RTC’s Bob Burton) once said, skipping owner’s title insurance is “penny wise, pound foolish.”

The buyer must also be reminded that the people who search the records are human.  They may miss a defect.  If they do, the lender and the buyer may learn a nasty lesson about a legal concept known as “subrogation.”

If the title insurer pays off the lender (and there is no owner’s insurance), the lender can be required to assign its rights under its mortgage to the title insurer.  If there is a major defect in the title to the property (such as discovering that it belongs to somebody else), the buyer may lose (or never obtain) possession of the property and the wherewithal to repay the loan.  The owner may then be sued by the title insurance company on the mortgage and have no means to pay.

The owner may make the argument that he reasonably relied on the title company to do a thorough search of the records and inform the lender (and him) of any problems.  If the title company failed to do an adequate job, perhaps the owner would have a shot at recovering on a negligence theory from the person who searched the records.

Of course, a title defect may surface that the title insurer could not reasonable be expected to discover.  If the problem is one of these “hidden defects,” the owner will have almost no chance of recovering from the title insurance company if there is no owner’s title insurance.   One of the great things about insurance is that the title insurance company may have to pay even when it couldn’t have uncovered the defect.

Even if there is no defect, a title insurance policy can be invaluable to the insured.  For example, suppose the owner leases the property to someone else and gives a very broad convenant of quiet enjoyment.  The tenant (who we believe is in financial trouble) moves out.  The owner sues the tenant, and the tenant files a counterclaim alleging that some defect in the owner’s title is a breach of the covenant of quiet enjoyment and the tenant is entitled to mega damages from the owner.

The tenant’s claim may be found eventually to be entirely without merit, but this is little solace to the owner who must shell out big bucks in legal expenses to defend against the tenant’s claim.  If the owner had title insurance, the title insurance company would be responsible for paying the costs and expenses of defending the owner’s title.

The moral of this story is quite simple:  always buy an owner’s title insurance policy.

About the authors:

Richard W. Rubenstein, Attorney at Law

Phone:  614-365-2752, Email:  rrubenstein@ssd.com

Squire Sanders & Dempsey LLP
41 S. High Street,  Suite 1300
Columbus, OH 43215-6113

Mark E. McGrady – contact information unknown

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