Title Commitments & Title Insurance Standard Exceptions To Coverage
Can Title Insurance Exceptions on Schedule B-II be Removed?
Real estate transactions are fairly complex legal matters, and first-time homebuyers in particular are likely to encounter many new and unfamiliar terms while preparing for the closing process that completes the deal and transfers ownership. Title insurance is one concept that buyers often have questions about, particularly the matters of title commitment and Schedule B exceptions to title insurance coverage.
What is title insurance?
Title insurance protects buyers of real estate against financial loss due to defects in the title of the subject property. When purchasing a home or other real property, buyers engage a title company to do a title search aimed at establishing the fact that the present owners have the right to sell the property as evidenced by a free and clear title that can be legally transferred to the new owner.
In some cases, a title may be defective or what is often referred to as “clouded”. A clouded title is exactly what the name implies: a case where title is not clear, making it difficult to identify the true owner of the property. One of the most common defects that can cloud a title is a false ownership claim on property that actually belongs to someone else.
There are many other potential title defects that can arise. A few examples include undiscovered liens and other encumbrances on the property, errors in public records, boundary/survey disputes or unknown easements, forgeries or other misrepresentations, improper wording of title and ownership transfer documents, missing signatures that are necessary for proper title transactions, and failure to follow correct real estate document recording or filing procedures.
There are two types of title insurance: an Owner’s Policy and a Loan Policy, so named according to who is offered protection by the insurance. The Loan Policy protects the lender from loss – all federally insured lenders are going to require a Loan Policy. Although an Owner’s Policy is not required in many states including Florida, it is not a good idea to accept the risk of going without Owner’s title insurance and few buyers do so.
The Title Search
The important thing to realize is that defects may have entered the chain of title many years (and owners) before the date of the present transaction. Such defects can come to light long after you have taken ownership, affecting your rights to the property.
Thus, the necessity of a title search aimed at determining that the subject property title is clear of any defects, or to find defects and allow them to be properly remedied before the property is sold or transferred. In most cases, this involves going through all the official records associated with the subject property. These are commonly held by the county or city government office charged with recording and storing such information. The title company takes care of this task during the title search.
The Title Commitment and Title Insurance Exceptions Schedule B
Almost all real estate purchase and sale agreements contain language stipulating that the seller must provide the buyer with title insurance. Therefore, once a successful title search has been conducted, a title company will issue buyers a title commitment, sometimes referred to as a title binder or preliminary title report. This basically amounts to a promise by the title company to issue a title insurance policy to the new owners after closing. The title commitment includes the same terms, conditions, and exclusions that will appear in the actual insurance policy.
Title commitments are most often presented on a standard form distributed by the American Land Title Association or ALTA. The ALTA form contains a section generally known as the Schedule B Section II. This is a list of exceptions to coverage offered by the title insurance policy. An exception is a specific item that is not covered by the policy. Any exception listed on the title commitment carries over to the title insurance policy and limits coverage provided under the policy.
The first few Schedule B-II exceptions are called “standard exceptions”. Every title commitment has standard or regional exceptions. These are exclusions from coverage that are not unique to the property under contract; they are applied by the title company to all properties. The standard Owner’s Policy does not cover defects in title, losses, or claims that fall within the standard exceptions.
There are usually four standard exceptions phrased along the following lines:
(The Policy will not insure against loss or damage resulting from…)
- Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and comprehensive survey of the property.
- Rights or claims of parties in possession – such as a current tenant with an existing unexpired lease, or any easements, claims of easements, or encumbrances not shown in public records.
- Construction, mechanic’s, contractors’ or materialmen’s lien claims for services, labor, or materials when such liens are imposed by law and not shown in public records.
- Taxes or assessments which are not shown as existing liens in the public records.
Removing Title Insurance Standard Exceptions
As any title insurance exception represents a possible future risk, it is in the property buyer’s best interest to eliminate as many as possible when they appear on the title commitment. Some common exceptions, for example liens or encumbrances that originate in the “gap” between the issue of the title insurance commitment and the date of transfer of the property, or unpaid taxes for the current year, are often eliminated per standard procedure before the closing date.
Standard exceptions listed in the commitment can also be removed before the actual title insurance policy is issued thereby expanding the coverage provided by the title insurance. This is most often done through the use of acceptable affidavits establishing that the conditions outlined in the exceptions do not exist or have been remedied.
For example, it is possible to provide affidavits identifying whether or not any tenants or other parties have rights to the property, or that an acceptable survey of the property has been conducted, that there has been no recently completed or contemplated improvements or other construction work done on the property, that there are no unrecorded fees, taxes, or assessments that do not appear as existing liens in the public records, and so forth.
Review Your Title Commitment Carefully
It is good practice to have an attorney conduct a thorough review of your title insurance commitment to identify and understand all exceptions presented therein. It is possible to remove, modify, or insure over most exceptions that will be encountered. In the case of standard exceptions on title commitments, the team at The Closing Agent and Barry Miller Law automatically remove them whenever possible.
If you or someone you know has questions concerning the schedule of exceptions on a title insurance commitment or regarding any other matter pertaining to real estate law, contact Barry Miller Law for assistance at 407-423-1700 or by email at info@BarryMillerLaw.com for a consultation.
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