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The Value of Title Insurance for the Cash Purchaser
Owner’s Coverage – An Essential Option
Here’s the story of a real claim from one of our underwriters. It stresses the importance of always purchasing an Owner’s Policy of title insurance with cash purchases. Yes, cash purchases and title insurance go together and need to go together!
Claim Summary Facts
For example, a $1.2 million owner’s title insurance policy was issued to Ms. Able. This was in line with the insured’s cash purchase of vacant land in a high-value area. Actually, this transaction was an REO sale. The property had been recently foreclosed upon by a local bank, and the insured, Ms. Able, received a quitclaim deed. Firstly, the title agent reviewed the land records and made the decision that title had validly. Next, the lender received it via a non-judicial foreclosure. Ultimately, they evicted the former owners in court. Now, the insured Ms. Able began the process of building her dream home on the lot.
Shortly after construction proceeded on her new home on the vacant lot, and it was going smoothly. As a huge surprise, the former foreclosed owners served a lawsuit! Consequently, the complaint alleged numerous defects not only in the foreclosure itself but in the underlying mortgage documents. Of course, the lawsuit, sought to set aside the foreclosure and restore title in the former owners. Unfortunately, a few of the allegations about the validity of the foreclosure had merit under state law.
In the next step, counsel engaged at the underwriter of the title insurance policy expense to defend the title. Ms. Able also filed a motion to dismiss the former owners’ complaint, since the validity of the foreclosure process was questionable. Based upon numerous legal bases, this lawsuit had everything! It’s never fun to be hanging your hat on equitable defenses from law books. Thankfully, the court, in this case, got it right. It ruled the former owners allowed a default judgment to enter in the bank’s proceeding against them. In this situation, the issue of the bank’s rightful title to the property had already been adjudicated. Any claim by the foreclosed owners that the loan documents were bad, or that the foreclosure was void, was dismissed, and finally good title rested in the hands of Ms. Able.
To concluded, there are some interesting points to consider:
- Firstly, underwriting a transaction where a foreclosure or other statutory process is in the back chain, title agents must confirm—often by a review of off-record evidence—to tag every statutory base. To sum up, the consequence of a bad foreclosure is therefore not a complete failure of title.
- Secondly, Ms. Able purchased the vacant property for $1.2 million, and that was the amount of the policy coverage. Having designed and substantially begun construction at the time of the lawsuit, Ms. Able’s damages in the event of a failure of title would have grossly exceeded policy limits.
- Thirdly and on the flip side, what would have happened if Ms. Able hadn’t purchased title insurance at all? Even though the title was successfully argued, it was at a cost of tens of thousands of dollars. Granted, would have been covered by the title insurance policy. Ms. Abel’s large purchase price in cash would have been at risk without the policy. Accordingly, how many investors purchase foreclosed property for cash, and then pump money into it for improvements before selling? The bottom line? For the prudent buyer, owner’s title insurance policy is never an “optional” investment!