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, why is it so important to invest in owner’s title insurance?
Let’s find out.
The story below illustrates how unsuspecting homeowners can find their property rights threatened. While this story is hypothetical, it illustrates a common title defect that can cause real financial implications.
Something Stinks in My Backyard
After an extensive search, Bob finally bought his dream home—a historic two-story Craftsman with a large backyard he planned to turn into a personal retreat. A title commitment was issued, and a survey showed nothing unusual that might interfere with his plans. The title search found no easements, but Bob still purchased an owner’s title insurance policy for $1,886 on the $300,000 home‡—just in case.
A few months after settling in, Bob was finalizing plans for adding a pool, gazebo and landscaping his back yard when he received an unwelcome letter. The local sanitation company notified him of its plans to run a new sewer line through his back yard. When Bob called to object, he was informed the company does, in fact, have an easement on the property that gives it permission to proceed. To make matters worse, Bob also learned that the easement prevents him from installing the pool and gazebo he had planned.
Bob was furious and wanted nothing more to do with this property. He was also concerned that he wouldn’t get back what he paid for the house, since the discovery of an easement could potentially reduce the perceived value. Then, Bob remembered he purchased an owner’s policy of title insurance, so he filed a claim with the title insurance underwriter.
The underwriter acknowledged that the ancient easement that had not been discovered during the title search (due to a clerical error) was a covered risk under the policy. As such, it compensated Bob for his financial loss; in this case: the difference between the value of the property with the easement and the value of the property without the easement.
For illustrative purposes, here’s how Bob was protected by his owner’s policy of title insurance:†
Cost Breakdown
The value of Bob’s property without the easement: $300K
The value of Bob’s property with the easement burden: $288K
Covered loss (reduction in value of the property) with an owner’s policy of title insurance: $12K
In this case, and many others, the insurance proceeds received from a covered claim far exceeds the cost of the one-time premium paid for an owner’s policy of title insurance. If Bob had not purchased 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 an 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 can restrict how homeowners use their land, for instance, if it interferes with the utility company’s ability to use an easement for a defined purpose. 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 may be 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 they 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
Why Title Insurance is Worth Every Penny
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 $1,886 owner’s policy (like the one in the story) is about a dollar ($1.03) a day. At 10 years, the price drops to 51 cents a day. By the time you’ve paid off a 30-year mortgage, just 17 cents a day ensures your family will not 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 a property in your area, contact your Old Republic Title representative today.
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‡ This premium was calculated based on a $300,000 purchase price of a home located in Dallas, Texas, with no discount for simultaneous issue of a lender’s policy of title insurance. Rates vary by state and you should contact your local Old Republic 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. Old Republic 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.
