When it comes to risk mitigation for property investors, title insurance may be the best kept secret in the industry. While the concept of title insurance is well known and most investors understand the basic coverage offered by a title insurance policy, many don’t know about the optional – and valuable – coverage that may be available to them. Litigation over property rights occurs daily, and often the risk at issue could have been covered by title insurance.
Even if you haven’t purchased a title policy for your own benefit, if you have a mortgage, you have purchased title insurance for your lender. For even the simplest transactions with the smallest of real estate collateral, lenders routinely require specific endorsements to their title coverage. Clearly, banks and other financial institutions are on to something. So, what is it that your lenders know that you don’t?
Simply put: Lenders know to take advantage of any chance to minimize risk. They know that extended title insurance policies with appropriate endorsements may cost a bit more at closing (usually on buyer’s dime), but will save them money in the long run. From insuring that a building conforms to applicable zoning ordinances, to removing the arbitration provisions from the title policy itself, there are many ways that title endorsements can change a title policy. For instance, if you are buying an LLC in order to obtain a parcel of land, the prior owner’s knowledge of defects could be imputed to you as the new shareholder – even if you had no idea about the issue at hand. However, a non-imputation endorsement would prevent the title company from assigning that knowledge to you as a defense against your claims.
The American Land Title Association, (ALTA), is primarily responsible for creating forms of standard endorsements which states may choose to adopt. In Ohio, most endorsements available are ALTA form endorsements. However, ALTA does not have a monopoly on title policies or endorsements in the United States. While ALTA is still the industry standard, many states have adopted their own endorsements. California, for example, issues California Land Title Associations (CLTA) endorsements in addition to ALTA endorsements. Of those states that have adopted ALTA endorsements, not all ALTA endorsements are available in each state (looking at you Florida), and some states don’t issue ALTA policies or endorsements at all (yes, of course it is Texas).
In whatever state you are in, endorsements can transform your title insurance coverage. For example, if there is an easement that runs through your property and the prior owner constructed a garage that encroaches into that easement, the easement and the encroachment would appear as exceptions to the title policy. However, you could still get coverage through endorsements over both the easement and the encroachment. With an ALTA 28.1 for instance, if the other party to the easement sued to force you to remove the garage, you could make a claim with the title company causing the title company to step in to defend you against the claim and, if their defense fails, to cover your damages.
Although title insurance is generally thought to be insuring over mistakes of the past, with certain title insurance endorsements, you can also insure the future of your property. If you are purchasing a vacant parcel of land with the express intent of building a multifamily apartment complex, there isn’t much to insure as there would be no potential encroachments, violations of restrictions or zoning issues at the time of purchase. However, if it is the future improvements that you would want to insure – you can, in fact, insure them. Through land under development endorsements, you can ensure that your planned improvement is in compliance with zoning ordinances, doesn’t violate any restrictions on record, and will not cause an encroachment (among other things) to avoid any unwanted surprises at the completion of your project.
All investments come with a degree of uncertainty. Since 2020, real estate investments have become even more uncertain and volatile. Regardless of the security of the investor, walking away from the type of insurance offered by today’s title companies would be a mistake. Do yourself a favor: the next time you review a commitment to issue title insurance, ask what endorsements and additional coverage your insurer can provide to your project. It just may save you in the long run.