Title Insurance
Does a Title Report Provide Insurance Against Claims?
We have an online course “How to Review a Title Report”, where our guest title attorney explains the differences between a preliminary title report, title commitment, and a title policy. Like other insurance policies, title insurance has a similar purpose of protection from some unforeseen title claim that could negatively impact the use or value of a property.
One of the key questions that comes up is whether a title company has liability based on any errors or mistakes within the preliminary title report. The short answer is probably no. During a past land development and entitlement project, we had a preliminary title report that completely missed a recorded water easement that impacted our site plan design and had the potential to impact our land value. In addition to being missed on the prelim, other as-builts and record plans at the City did not show any water line in this particular area. Our civil engineer happened to stumble upon this water line within other record plans, and when we went back to the title company, the title officer confirmed a recorded easement on the property.
We were fortunate that we could design around this easement, and we did not lose any lots nor have any significant cost impacts. But if we did have impacts to the land value or project, the preliminary title report would not have provided any title insurance protection. As my title attorney expert explains, first you need to have experienced damages to make a title insurance claim. So let’s say that you had a land parcel tied up for a 90-day due diligence period. Chances are you have spent some money on consultants and studies, but you haven’t purchased the property yet, so probably minimal damages. But let’s suppose that you have a 12-month escrow period and you are releasing $500,000 in non-refundable deposits after 90 days as good faith for the longer escrow period. Discovering an overlooked water easement after the $500,000 is released to the seller could be lost money if your project is deemed economically infeasible due to this easement and you have to walk away from the transaction. But title policies are issued at the close of escrow, so how do you protect against title issues during the long escrow period?
The answer would be in the form of a title “commitment” from the title company. Prior to releasing the $500,000 deposit, requesting the title company to commit to a policy at closing would provide title insurance during the escrow period in case anything was missed. Without the title commitment, you just have the preliminary title report which will not help you with any losses.
If you have any experience, comments, or questions regarding a similar title matter, we welcome you to share with us below.
