Most home buyers purchase hazard insurance to protect their property against future casualties like fire or flood. Home buyers should also protect their ownership interest in their new home by purchasing an owner’s policy of title insurance (“Owner’s Policy”).
So why is an Owner’s Policy important?
Let Reiling, Teder & Schrier, real estate attorneys, walk you through the intricacies of an Owner’s Policy, and how it can benefit you.
What’s an Owner’s Policy for?
The purpose of an Owner’s Policy is to protect a buyer against defects that encumber or otherwise impact title to the real estate being purchased. Furthermore, an Owner’s Policy insures against losses due to events that occurred prior to the buyer’s purchase of the real estate. Unlike hazard insurance, the premium for an Owner’s Policy is paid one time at the closing of the purchase, and the coverage lasts the entire period of the buyer’s ownership.
In Indiana, buyers often require sellers to provide a commitment for an Owner’s Policy (“Commitment”) in the amount of the purchase price by including this condition in the offer to purchase. Although in Indiana the seller usually pays the premium for an Owner’s Policy, the parties may negotiate this obligation. The purchase agreement should provide whether the seller, the buyer, or both will pay the premium for the Owner’s Policy, and the search, examination, escrow, and closing fees charged by the title company.
Title Company Issues Owner’s Policy
The purchase agreement may also designate a particular title company to be used for issuing the Owner’s Policy and conducting the closing. The Indiana Department of Insurance publishes a title insurance rate comparison tool on its website which lists residential owner’s policy rates for title companies operating in the state. The premium for an Owner’s Policy on a $200,000 home averages approximately $550.
To minimize potential liability to the property owner, the title company will research the property’s title records for liens, easements, mortgages, and other encumbrances. Title companies can provide a complete ownership chain of title for a property up to a term of 20, 30, 40, 50 or more years. The term of the search may impact the search and examination fees charged by the title company.
Upon completion of the search, the title company will issue a Commitment—the title company’s promise to insure title and the terms of its coverage. The Commitment will disclose the owner(s) of the property and the documents or information that the title company needs from the parties to the transaction.
The Commitment will also exclude certain encumbrances or issues discovered in the title search that could affect the title to the property. These encumbrances or issues are often referred to as “exceptions.” Exceptions may include, without limitation, easements, recorded surveys, and restrictions and covenants of record. The title company is not responsible for compensating the policy owner for any damages that arise from an exception to the Owner’s Policy.
With respect to the various above-noted exceptions, easements restrict an owner’s right to use, develop, or improve a property according to the terms of the agreement establishing the easement. Restrictive covenants may prohibit certain uses or improvements of a property, requiring the owner to obtain permission from an architectural control committee or similar board before constructing improvements on the property. Because these types of exceptions affect how the property can be used, it is important for buyers to review any documents evidencing the easements, judgments, covenants, etc. upon which each exception is based.
How Might an Exception Affect a Property Owner?
Consider, as an example, a homeowner’s plan to build a storage shed. The homeowner’s association for the subdivision may have restrictive covenants that strictly prohibit sheds, that provide specific guidelines regarding the size and appearance of the shed, and/or that require the homeowner to obtain the consent of an architectural control committee before installing the shed.
Consider another example of a homeowner whose neighbor has the right pursuant to an ingress-egress easement to drive over the homeowner’s property to access his or her own property. If the easement is listed as an exception on the Owner’s Policy, the homeowner will not have a claim against the title company under the Owner’s Policy for damages relating to such access and, additionally, may have no right or ability to stop the neighbor from driving over his or her property.
Exceptions disclosed on the Commitment might also warn a buyer that changes should be made to or with respect to the property. For example, an exception shown on a Commitment may alert the buyer that the property’s driveway extends over the property line onto the neighbor’s land. If this issue is not discovered and resolved prior to closing (such as by having the seller either move the driveway or obtain an easement or encroachment agreement from the neighbor to allow it to remain), the title company will not help the buyer resolve this issue after closing.
Careful review of the exceptions set forth in the Commitment will allow a buyer to avoid potentially large expenses—in the example above, if the neighbor later demands that the driveway be moved, the cost of moving the driveway or defending the neighbor’s claim would fall upon the buyer.
Not every exception listed on an Owner’s Policy is necessarily a concern. For example, the title company may list a public utility easement as an exception. Generally speaking, the purpose of these easements is to allow a utility provider such as a gas or electric company to access the owner’s property to install (under or above ground), repair, replace, monitor, and remove utility lines, pipes, equipment, and other fixtures. These easements are fairly common exceptions and are not likely to create any problems for the property owner so long as the easement is properly limited in size, location, and scope.
Protection for the Future of Your Lafayette Home
A Commitment and related Owner’s Policy provides a buyer with a valuable opportunity to avoid unexpected trouble down the road. An attorney can help a buyer carefully review and understand the Commitment and the exceptions referenced therein. Even more importantly, an attorney can help a buyer determine how to spot and address exceptions that could be a problem.
The attorneys at Reiling, Teder & Schrier are experienced with real estate law and can help you by reviewing title commitments and providing guidance related to matters excepted from coverage. For more information or further questions, contact Reiling, Teder & Schrier today.
**Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company. The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice. The information on this website should not be relied upon to make any decision, legal or otherwise. If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state. The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.