Where There is Cause for Concern, Get Extended Title Coverage

Remember a long story published last week about the poor home owner in a Quigley home who is being ragged by the paving company to pay for his driveway? Was anything said about the title company? Where were those guys? Isn’t that what title insurance is all about?

Trying to make sense of lien claims that are complicated by a bankruptcy can drive even the lawyers wild. Little wonder the poor home owner and the newspaper reporter didn’t appreciate what was going on. Let’s try to tell what Paul Harvey would call “the rest of the story.” To do that we have to get into what title insurance is all about, and why a buyer needs to consider purchasing more than the minimum coverage when the transaction is clouded with legal complications.

Everybody who bought from Quigley knew the party was not going to go on forever. The guy built cheap houses, but the business philosophy seemed to be “we can lose a little on each deal and make it up on the volume.” Anchorage has been through builder failures before. Agents and the public knew they needed to be careful, especially if they were trying to buy a Quigley property held by the bankruptcy trustee or the interim construction lender.

So there was title insurance. Almost every deal has title insurance. Buyers moved in, thinking that if anyone came knocking on their door saying they didn’t get paid for some part of the construction that the title company would pay them off. Wrong! The mistake was that nobody talked about extended coverage.

“Less than one percent of the policies we issue in residential transactions are for extended owner’s coverage,” says Art Esch, president of Stewart Title. Stewart is one of two direct outlets for title underwriting in Anchorage. The other is First American Title. Steve Jewett, First American’s president, concurs that “less than five percent” of residential deals have extended coverage, but adds that eighty percent of commercial deals have extended coverage.

What would extended coverage do? Lots of things that standard coverage omits, like easements, taxes or encumbrances not of record, encroachments and boundary conflicts which a full survey would show, unrecorded claims of parties in possession, unpatented mining claims, and unrecorded liens for services, labor or materials. First American says it covers legal rights of access under its standard coverage; Stewart provides it as extended coverage. Even all this broad coverage does not include zoning and other governmental violations, like discovering your triplex is on a lot that’s zoned for no more than a duplex.

So in a builder bankruptcy the smart homeowner probably should consider paying the 35 percent extra charge above the cost of standard coverage the owner normally pays. Considering the list of additional coverage, an extended policy is a good idea in any transaction where legal issues such as these may be lurking.

Title insurance is mostly a mystery to the consumer. It almost seems like title companies only take in money and never pay it out. Ask for examples of claims they have paid and there’s often a long pause before they tell you a story. Why is this?

Title insurance is different from risk-oriented insurance like auto coverage, Esch and Jewett agree. Your car insurer says it will pay if something bad happens in the future. The title insurer doesn’t do that at all. They start by telling you what the risks are now. Then they say they don’t cover those risks! Next they add that anything bad that happens after you close is your problem. So what do they cover? Only the short list of things they and you don’t know about when you take title.

Consider a day. You leave home after moving into your new home. A drunk slams into the car. File a car insurance claim. At the office you get a call from a contractor who didn’t get paid by the former owner. If you had extended coverage, file a title insurance claim. That evening you come home to discover the neighbor has put up a fence that encroaches your property. Forget it, that’s after the fact.

Ironically, your lender gets the extended coverage that you have to pay extra for if you want coverage as an owner. The ALTA policy, normally a buyer cost, insures the lender and contains all these extended provisions. They don’t cover you as a home owner unless somebody pays the 35 percent premium. Even if you are willing to pay the additional fee the title company may require an upgraded “ALTA survey.” First American’s description of it runs for seven closely typed pages. Where a routine as-built recertification normally costs $150–$200, an ALTA survey costs at least $800 and may run as much as $2000.

The title company’s role is to identify risk before the transaction closes and encourage the buyer and seller to eliminate or minimize it. The preliminary title report shows what the risks are, saying that it won’t insure what it has identified. What you as buyer accept in a property includes no insurance for matters everyone knew about from the title report. The insurance is only for a selection of items nobody knew about at closing. Where there is cause for concern, get extended coverage.