Imagine buying your dream home, moving in, and then being contacted by an attorney representing the seller’s creditors. The attorney informs you that there was a pre-existing lien on the home in the form of an unpaid tax bill or a mortgage, that was incorrectly recorded in the county land records. This lien was not discovered until after closing, but as the new homeowner, the lien may now be your responsibility.
In the past, when a title issue was discovered after closing, and it was not due to the negligent error or omission of the title company, buyers had little recourse. It is for this reason that title insurance was created, and it is for this reason that the law in Virginia requires settlement agents to inform buyers of their right to purchase an Owner’s Title Insurance Policy.
The origins of title insurance - Watson v. Muirhead. Watson v. Muirhead, a Pennsylvania Supreme Court ruling from 1868, is often credited for giving birth to the practice of insuring title. In this case, Muirhead was hired by Watson to conduct a title search on a property Watson was considering for purchase. This required Muirhead to verify the seller’s ownership rights and to determine whether any other rights, interests, liens, or encumbrances existed with respect to the property. Muirhead did discover a lien but was advised by his attorney that it was not a valid lien. Relying on this erroneous legal opinion, Muirhead concluded that the title was clear.
In reliance with these findings, Watson purchased the property, but subsequently lost it when it was sold at a Sheriff’s sale to satisfy the previous owner’s creditor. Watson brought suit against Muirhead and sought damages for his losses. The Supreme Court upheld the lower court’s dismissal of the case and found that though Muirhead’s determination was mistaken, his actions did not rise to the level of negligence, therefore Muirhead could not be held liable for the damages.
This outcome left Watson without recourse for his losses which were directly attributable to Muirhead’s admittedly erroneous title report.
So, what is title insurance and how can it protect you, as the buyer, in a situation like Watson’s?
What is title insurance? Title insurance is an insurance product that protects an insured’s legal interest in a property. While the specific coverage afforded will depend on the type of policy selected, generally speaking, this includes protection against loss due to title defects caused by liens and encumbrances on title (like those experienced by Watson), fraud, forgery, missing heirs, documentation errors, or filing and recording errors at the county clerk’s office.
Lender’s policy v. owner’s policy. There are two types of title insurance policies: a Lender policy and an Owner’s policy. Both the Lender’s policy and the Owner’s policy require a one-time premium paid at the time of settlement. The Lender’s Policy protects the lender’s legal interest in the property in an amount up to the remaining balance of the loan and is effective until the loan is paid off. Accordingly, it is required by most lenders as a condition of the loan. The Lender’s policy does not offer protection to the buyer. For the buyer’s interest to be protected, the Owner’s Policy is required. The Owner’s Policy is effective as long as the owner has an interest in, or liability for, the property. In Northern Virginia, this period can be in perpetuity. The standard Northern Virginia purchase contract requires the seller to provide a General Warranty Deed. The type of warranty contained in a General Warranty Deed states that the seller is legally guaranteeing good and marketable title to the property during their ownership and the period prior — FOREVER. Consequently, a homeowner will always be in the potential chain of liability, even after selling the property.
Virginia law requires settlement agents to notify buyers about the availability of title insurance. More specifically, Title 38.2, Chapter 46 § 38.2-4616 of the Virginia Code specifies, in relevant part:
[T]he settlement agent…before the disbursement of any funds, shall obtain from the purchaser a statement in writing that he has been notified by the settlement agent that the purchaser may wish to obtain owner’s title insurance coverage including affirmative mechanics’ lien coverage, if available, and of the general nature of such coverages, and that the purchaser does or does not desire such coverage…
In accordance with this law, at Vesta Settlements, one of the closing documents we have our buyer clients sign at closing is a document called “Notice of Availability of Owner’s Title Insurance”. This document informs buyers of their right to purchase title insurance, outlines the benefits of the policy, and asks buyers to specify whether or not they wish to purchase an Owner’s Title Insurance policy. Should buyers choose to waive their right to purchase the Owner’s Title Insurance policy, they acknowledge in this document that they are doing so at their own risk.
A title insurance policy, among other things, can help to protect a buyer in a situation like that of the case involving Watson v. Muirhead. It can protect buyers from potential costs and liabilities and help to mitigate many other title headaches that could arise after closing. It is a relatively low, one-time price to pay for peace of mind. For more information on title insurance and other important decisions to consider when purchasing a home, be sure to read our Home Purchase 411 guide (available here). You can also find information on the relationship between title insurance and a surveys in our previous article on What is a Survey and How Does it Protect You (available here).