Purchasing a home can be an exciting prospect, but as part of the due diligence process, it is important to understand what is covered by title insurance. Obtaining a title insurance policy can be just as important as performing a physical inspection of a property. How does an average consumer confirm that the person they are buying a property from (and paying the purchase price) actually owns that property? And how does a purchaser rest without worrying about possible unknown liens or mortgages that may exist which could cause the property to go into foreclosure? The answer to these questions is by obtaining a title insurance policy prior to closing. A title insurance policy provides insurance to a purchaser (or mortgage lender) of real estate who suffers a loss or damages related to the condition of the title to the property. This article will discuss the importance of obtaining a title insurance policy and the commonly litigated exceptions contained in title insurance policies.
Does the Buyer or Seller Pay for a Title Insurance Policy?
The overwhelming majority of real estate purchase agreements in Michigan include a provision that requires the seller of the property to pay for a title insurance policy in favor of the purchaser at closing. However, there is generally no law that requires title insurance on the sale of real estate in Michigan. There are some exceptions to this general rule, for example, a developer of a condominium project is required to provide a title insurance policy to any purchaser of a Condominium Unit from the developer. See MCL 559.194. Although it is typically not required to obtain title insurance in order to purchase real estate, most real estate transactions in Michigan include the issuance of a title insurance policy at closing.
Even though most purchase agreements are drafted to require the seller to pay for title insurance for the purchaser, this can be modified by contract and the purchaser could agree to pay for their own title insurance or agree to close without title insurance. Most title companies in Michigan charge similar rates for title insurance, and the cost changes based on the purchase price for the property, which is typically the amount of coverage the policy will provide. For example, an owner’s policy of title insurance on a $100,000 purchase price would likely be around $815.00, not including other closing costs (such as closing fees, escrow fees, transfer taxes, recording fees). The cost for a $500,000 home would likely be around $2,065.00, not including other closing costs.
In general, the cost of a title insurance policy is typically very reasonable, particularly considering the fact that it is only a one-time payment, and the policy typically lasts for as long as you own the property. Stated simply, if someone is spending hundreds of thousands of dollars (or millions) to purchase real estate, it would be foolish to do so without obtaining an owner’s policy of title insurance to secure your investment.
What Should You Look for in Reviewing a Title Insurance Policy?
Throughout the due diligence process (which typically takes place between the time a purchase agreement is signed and closing), the title company issuing the title insurance policy will first perform a title search to review the status of the title to the property through various public records, including the Register of Deeds and local municipality tax assessor’s records. The cost of the title search is typically included within the costs of issuing the insurance policy. Once the title search has been completed, the title company typically also reviews other title insurance policies that have been issued for the same property in the past (even if they were issued by different title companies) to compare their findings and determine if anything was missed in the search.
Once the review and search are complete, the title company issues what is a called a title commitment, which shows the legal description for the property, the results of the title search, certain exceptions that will not be covered by the title insurance policy and sets forth certain requirements that must be satisfied before the title insurance policy is issued. The legal description should be carefully reviewed (potentially with a licensed real estate surveyor) to confirm the boundary lines of the property that is being purchased. The legal description set forth in the title commitment is typically going to be copied and used in the deed that the seller will sign to convey title to the property to the purchaser at closing.
The requirements section of the title commitment might include providing a copy of a certificate of trust or operating agreement if the property being sold is held by a trust or a limited liability company, along with other common requirements such as paying off and discharging any current liens and mortgages. The exceptions section of a title commitment is one of the most critical areas to carefully review before closing. The exceptions section will exclude a list of items that could potentially be considered defects with the title to a property from coverage, which means there will be no recourse against a title company if a purchaser sustains a loss or damage from one of the exceptions.
What Are the Common Exceptions Contained in a Title Insurance Policy?
Many exceptions are included in all transactions and are referred to as “standard exceptions” which typically include matters related to easements not shown by public records, unrecorded construction liens, and boundary line disputes and discrepancies that could be disclosed by a survey of the property. Many other common exceptions listed in most title commitments include oil, gas and mineral rights, riparian rights, available divisions under the Land Division Act, unpaid taxes or other assessments due after closing, liens for unpaid water and sewer charges, and rights of parties in possession of the property (such as tenants).
Many standard exceptions in title insurance policies (such as those relating to construction liens, unrecorded easements, and boundary line disputes) can be removed by the title company prior to closing if a certified survey is performed and the seller of the property signs an owner’s affidavit attesting to the condition of the property. However, some exceptions are difficult (if not impossible) to get removed, such as exceptions relating to divisions available under the Land Division Act and exceptions relating to oil, gas, and mineral rights.
In addition to the standard exceptions in title insurance policies, title commitments will also list nonstandard exceptions, which are matters that are specific to the property that is being purchased. These specific exceptions will include recorded easements (including utility and access easements), deed restrictions, matters related to subdivision plats, matters related to condominium master deeds, condominium bylaws, judgments related to the property, rights of first refusal, memorandums of leases, cost sharing agreements, and any other document recorded as a matter of public record that impacts the property. Some title companies automatically provide a hyperlink in the title commitment so that you can view a full copy of the recorded exception documents, but many title companies do not provide these documents unless a party requests them. It is critical to obtain copies and review all recorded exception documents prior to closing. Most purchase agreements provide a limited period of time in which a purchaser may object to the title commitment and/or request the seller clear any title defects.
What Types of Exceptions in Title Insurance Policies Are Commonly Litigated?
One of the most commonly litigated exceptions in title insurance policies is the “survey exception” which excludes coverage for encroachments, encumbrances, violations, variations, or adverse circumstances affecting title that would be disclosed by an accurate and complete survey of the property. Boundary line disputes are much more common than the average purchaser may believe, and although surveys are rarely obtained by purchasers in most residential transaction, surveys are always recommended so that a purchaser understands the location and existence of any utilities and any boundary line discrepancies prior to closing. In Muscat v Lawyers Title Ins Corp, 135 Mich App 26; 351 NW2d 893 (1984), the plaintiff purchased property and obtained a title insurance policy with the standard survey exception. Several years after purchasing the property, the Plaintiff received a survey revealing that part of the building on his property extended beyond the boundary line of his property. The Court of Appeals held that “there was no genuine issue that the insurance policy exclusion for ‘any matters which would be disclosed by an accurate survey’ applied in the present case so as to exempt defendant from any liability to plaintiff in connection with the encroaching building.”
Another commonly litigated exception involves “easements, liens or encumbrances, or claims thereof, not shown by the Public Records.” In Ditmore v Lochner, unpublished per curiam opinion of the Court of Appeals, issued March 24, 2005 (Docket No. 251572), the Michigan Court of Appeals held that there was no title insurance coverage related to an unrecorded judgment that arguably impacted the property. Specifically, the Court of Appeals held that the title company “had a right to rely on its ‘public records’ policy exclusion” as a basis for denying coverage. Similarly, in Podorsek v Lawyers Title Ins Corp, unpublished per curiam opinion of the Court of Appeals, issued December 11, 2003 (Docket No. 241450), the Michigan Court of Appeals held that a drain easement that was filed with the drain commissioner’s office, rather than with the register of deeds, did not provide constructive or actual notice of the easement, and therefore, there was no title insurance coverage because the encumbrance was not shown by public records. Although there may not be title insurance coverage related to a matter that is not recorded within the public records, the seller of the property may still be liable to the purchaser if the seller conveyed the property via Warranty Deed and failed to disclose the existence of the unrecorded encumbrance on title to the property. In addition, an easement that is not recorded with the register of deeds “is void against subsequent purchasers in good faith.” Allen v Bay Co Rd Comm, 10 Mich App 731, 734; 160 NW2d 346 (1968).
In Ludlow v Hackett, unpublished per curiam opinion of the Court of Appeals, issued July 2, 2009 (Docket No. 283189), the Michigan Court of Appeals examined whether insurance coverage extended beyond the “Land” (which was legally described in the title commitment) and whether coverage also existed for portions of vacated streets within a subdivision plat. In Ludlow, the plaintiff’s insurance policy only provided coverage for the “Land” and specifically excluded coverage for “any right, title, interest, estate or easement in abutting streets, roads, avenues, alleys, lanes, ways or waterways.” Although the title insurance policy excluded coverage for vacated roads and streets, the plaintiff obtained a Warranty Deed which included a conveyance of a portion of a vacated street. The Michigan Court of Appeals held that the policy “broadly and plainly removes from coverage ‘any rights, title, interest, estate or easement,’ private or public, ‘in abutting streets road, avenues, alleys, [and] lanes…’” and thus, there was no title insurance coverage for the disputed portion of the vacated road.
Another commonly litigated exception relates to “rights or claims of parties in possession not shown of record.” In Boyadjiew v Transnation Title Ins Co, unpublished per curiam opinion of the Court of Appeals, issued December 29, 2005 (Docket No. 257618), the Michigan Court of Appeals reviewed whether there was title insurance coverage for a quiet title lawsuit filed by an insured’s neighbor who claimed adverse possession. The Court of Appeals held that the foregoing exception precluded insurance coverage and specifically held that “regardless of whether the exclusion applies to claims of parties actually in possession or claims of parties merely claiming to be in possession, the exclusion applies to any possession that is not of record.”
As set forth above, the extent and nature of title insurance coverage is a frequently litigated matter. Unfortunately for many purchasers, by the time they learn of a defect with title, it is already too late. In order to properly mitigate the risks of title defects, purchasers should carefully review the exceptions listed in their title commitments, obtain surveys prior to closing to identify the existence and location of all utilities, easements, and any boundary line discrepancies, and carefully confirm the legal description of the property before closing. If a purchaser does not understand the title policy, it is prudent to consult with a real estate attorney to review the title policy prior to closing. A real estate attorney can also assist in obtaining specific endorsements to title insurance policies to cover for unique risks related to certain types of property. Finally, purchasers should remain mindful of the fact that even if title insurance does not cover a loss, the purchaser may be able to sue the seller if the seller provided a Warranty Deed. Accordingly, if a quiet title issue arises, a seller should also contact a real estate attorney to discuss their options.
Brandan A. Hallaq is a Senior Attorney with Hirzel Law, PLC where he litigates cases involving defective construction, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. Mr. Hallaq is also a licensed Real Estate Broker in the State of Michigan and prepares the necessary documents for business and real estate transactions, including purchase agreements, franchise agreements, loan/financing documents, and commercial and residential leases and mortgages. In each year from 2018 through 2022, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. He was also recognized as a 2020 Up & Coming Lawyer by Michigan Lawyer’s Weekly, an award given to no more than 30 attorneys in the state each year, and he was recognized by Best Lawyers in America: “Ones to Watch” for 2021 and 2022 for professional excellence in real estate law. He can be reached at (248) 480-8704 or at firstname.lastname@example.org.