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There has been much debate about title insurance versus an attorney’s letter. Many homebuyers are confused between the differences. Now, that is where this blog post comes in. An attorney’s letter of opinion offers a simple way of showing the title to a property is clear. For example, a letter from your family’s attorney would show that the title is free and clear. That being said, title insurance offers a more solid foundation with protection from title defects with the backing of an underwriter.
What We’ll Cover
To start, there are a few items we’d like to cover. First, we’ll explain what exactly is title insurance is. Following that, we will explain what an attorney’s letter of opinion is. Next, we’ll dive into WHY this debate is important. It all boils down to an old Pennsylvania court case. Lastly, we will explain why choosing between title insurance and an attorney’s letter of opinion has become such a hot topic.
Title insurance is protection against property loss or damage that may come up due to defects in the title of a property. We will be straightforward: title insurance is what we do best at Landmark Abstract, and we know quite a bit about it. We’ve helped countless individuals and businesses with their real estate transactions, including title insurance.
The Advantages of Title Insurance
Title Insurance, in contrast to the next option, provides greater protection against title defects. It has more money backing up policies for insurance purposes, thanks to an underwriter. Additionally, this policy is in effect for as long as you reside in your property. A home is a HUGE investment, and you want to protect it, right?
Some of the defects title insurance can protect you from are, but not limited to:
- Errors in a deed’s legal description
- Surprise heirs
- Undisclosed divorces and marriages
- Other unforeseen risks and errors
These are headaches you do not want and do not have time to solve! Besides, you could lose your home over any one of the above issues.
Attorney’s Letter of Opinion
An attorney’s letter of opinion discloses an attorney’s opinion regarding a title search on a property, especially about what is on public record. Basically, an attorney can submit a letter to your lender stating what is found on the property search with their seal of approval. Sounds easy enough, right?
The Dangers of an Attorney’s Letter of Opinion
There are quite a few dangers concerning an attorney’s letter of opinion. MONEY is the main reason to avoid an attorney’s letter of opinion. Not necessarily for the cost purposes, but an attorney usually does not have the funds to back up claims made against a property if something on title turns up.
Besides the financial factor, there are a three other factors to consider when looking at the option of attorney’s letter of opinion versus title insurance:
- Attorneys retire, move, and pass away. Who does responsibility for the letter pass on to?
- Law practices are absorbed into larger law firms. Will the new law firm honor the letter?
- Attorneys may let their malpractice insurance expire. Who will bear financial responsibility?
- Ultimately, the attorney’s letter only is addressed to the LENDER, and only covers the lender. There is no owner’s policy.
Watson v. Muirhead
Watson v. Muirhead is a court case in Pennsylvania from 1868 that laid the for title insurance in the state. Additionally, it also illustrates WHY an attorney’s letters can be dangerous. We’ll start with an overview of the case, the outcome, and the aftermath.
The Court Case
In Philadelphia, Pennsylvania in 1859, Mr. Mark Watson bought property from Mr. Charles Muirhead. As the time to settle on the purchase came close, the a very rushed title search and examination was completed.
The title search found three judgments (a court order that is decided in a law suit) on the property. Mr. Muirhead consulted his attorney, Mr. Wharton to look over the search and determine if the judgments were a problem. Mr. Wharton stated that the judgments were not a problem, including one from a prior sale. According to the attorney Mr. Wharton, the title was clear. , Mr. Muirhead took his attorney’s opinion, and then sold the property to Mr. Watson.
The story did not end there. Remember the third judgment from the title search? Yup, it turned out to be a huge problem. The property ended up in sheriff’s sale because the debt wasn’t paid off from of the proceeds of the sale, and Mr. Watson lost his investment.
The Court’s Decision
The Pennsylvania Supreme Court heard the case in 1868. Who won?
Why did the court rule in favor of the defendant, you may ask? As demonstrated, Mr. Muirhead went on the word of his attorney, believing that the title of the property was free and clear, and sold the property to Mr. Watson. Mr. Muirhead was not responsible for the errors of his attorney.
You can read the court case here.
The Aftermath: Title Insurance!
Something good did come out of this court case: title insurance! In 1874, the Pennsylvania legislature passed a law that allowed for title insurance companies to incorporate. This new law allowed for “responsibility without proof of negligence, financial protection through a reduction of the risk of insolvency, and the assumption of risks beyond those disclosed in the public records.” (from Fidelity National Financial)
What’s The Issue With Attorneys’ Letters, Then?
Government agencies have started accepting attorney’s letters in place of title insurance for people who are applying for mortgages. The Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac have all started accepting letters. They believe it will lower the cost of settlements and would allow more people to borrow.
Why This is Important
More people could still get into homes from this policy change. Still, this policy could potentially put a lot of people at risk of losing their homes due to title defects. A title insurance policy is a much safer route.
To sum up, title insurance is the much sounder option versus an attorney’s letter of opinion. Title insurance offers the backing of an underwriter, many of which have been around for decades, and offers peace of mind for your investment from title defects. An attorney’s letter shows the results of a title search. It may seem like a good choice on the surface, but it could cause you a lot of problems down the road. Here’s a handout that we found helpful that you may want to have on hand. If you like more detailed information, this booklet offers an AWESOME comparison of title insurance to attorney’s letters of opinion.
We encourage you to consider all your options when it comes to insuring your home during a purchase or refinance. Ultimately, an owner’s policy of title insurance from an established underwriter is your safest option.
We have a wealth of information on our web site regarding title insurance, and we invite you to explore the the articles we have below.