About eight months after Francine and Dennis Lott bought their home and 11 acres in St. Mary's County, a neighbor mentioned that they might not have clear title to all the land.
The previous owner, they were told, had deeded an 45-foot easement to another neighbor, cutting through a field where the Lotts kept their horses. A lawyer assured them that they had nothing to worry about, but three years later when they tried to refinance their mortgage, they were informed that the easement question had to be resolved before they could get the loan.
Fortunately for the Lotts, they had owner's title insurance, a little-understood form of insurance designed to protect property owners from mistakes in their title search. For the Lotts, having the insurance meant they had a lawyer who would defend their interests in court and pay to settle any claims against them.
Started in Philadelphia more than a century ago, nearly anyone taking out a loan to buy property also purchases title insurance to protect the lender. But owner's title insurance is optional, with about half the homebuyers across the country opting for the coverage, industry experts say.
Initially, the Lotts' lawyer told them the owner's title insurance was unnecessary, but because they had always bought title insurance with their other homes, the couple paid the $275 to cover their equity. Now as they prepare to go to court to defend their title to their land, they are glad they did.
"Most people won't use it," Francine Lott said. "But that time when you do will make up for all the other times you don't. It's the greatest thing."
About 25 companies in Maryland are authorized to underwrite title insurance, which is sold through about 3,000 title insurance agents, according to Sandy Costagna of the Maryland Insurance Commission, which must approve the rates companies charge for title insurance.
No matter who sells the insurance, policies and prices vary little and are based upon the value of the property. Owner's title insurance on a $150,000 home, for example, would cost about $500.
Costagna said the differences are usually in the fees the title companies or title lawyers charge for their services.
While the lender's insurance protects the amount the bank has tied up in a property, the owner's policy protects the buyer's equity -- an amount that increases over time as the mortgage is paid down. The insurer will defend the title against any claims while the owner holds the property.
Unlike other insurance that protects the holders against future events, title insurance covers past mistakes, made accidentally or deliberately in the search and recording of the title. In that regard, the insurance is more like a warranty.
With a title insurance policy, a search is made to ensure that the title is clear of liens or other liabilities.
The insurance can also protect from unscrupulous title representatives who might not disburse escrow money collected at settlement for taxes, insurance and other fees.
In Howard County, a title attorney was convicted of embezzling $1 million in real estate escrow funds from his clients. Many of the victims were reimbursed because they had bought title insurance, but those who did not lost their money.
Title disputes can develop even in high-profile deals.
The Maryland Stadium Authority filed suit in June against Hammerjacks, charging that the club had failed to disclose a lien for unpaid city property taxes on two of the three parcels the authority bought for the Ravens' football stadium.
As part of the sales agreement, Hammerjacks was to convey "unencumbered" title to the stadium authority, according to the suit. Hammerjacks worked with Commonwealth Land Title Insurance Co. to identify any liens against the property, the suit said, but never identified a lien by the city for unpaid property taxes of $26,154 on two of the parcels.
In the case of the Lotts, their insurance protects them because the title clerks didn't find a property easement recorded in an obscure document in the courthouse.
Ronald P. Fish, a commercial real estate lawyer with Ballard, Spahr, Andrews & Ingersoll, said he always advises buyers to purchase owner's title insurance, even if they are buying from a relative and think they know the title history. "It's such a small piece of the puzzle, it's probably foolhardy not to get it," he said.
But owner's title insurance is usually not needed in a refinancing if the landowner bought a policy when purchasing the property, because a policy is good for as long as the policyholder owns land, Fish said.
The popularity of title insurance varies across the country, being more common in the West than on the East Coast, where homebuyers still frequently rely on lawyers to research their title records.
In Maryland, title insurance is more popular in the Washington and Baltimore areas than in more rural parts of the state, according to Ted Rogers, vice president of the Security Title Guarantee Corp. of Baltimore.
Although homebuyers may opt to forgo the title insurance and depend upon their lawyers, Rogers notes that homeowners do not have the same level of protection that they would if they had the insurance.
He advises homebuyers to obtain several quotes before deciding on a title insurance company. Although the policies are usually the same, the fees that title companies charge can vary.
And Rogers warned that price should not be the only factor considered. In times like today, when lower interest rates are prompting more refinancings and home purchases, new title companies may lack the experience to do a thorough title search.
While the number of claims made against owner's title insurance policies is unknown, business experts say it is small -- less than 10 percent of the premium dollars are paid out in claims, according to the American Land Title Association.
James R. Maher, executive vice president of the group, said the small number of payouts is a testament to how well the insurance works.
Most of the money in a policy goes for researching the title and rooting out problems before settlement. "A lot of it happens behind the scenes and you don't know it," Maher said.
"Your object in getting title insurance," he said, "is not to have claims."
Guide to title insurance
What is it?
Insurance purchased for a one-time payment that provides a safeguard against loss arising from defects in the title.
In an effort to eliminate risk before insuring, a search is made of public land records for matters affecting title to the real estate.
What is the difference between owner's coverage and lender's coverage?
Lender's title insurance is usually required by the bank and mortgage companies to protect the security of their loans. The amount of lender's title insurance decreases and eventually disappears as the loan is paid off.
Owner's title insurance ordinarily is issued in the amount of the real estate purchase and lasts as long as the insured or his or her heirs have an interest in the property.
Examples of problems that can arise in a title:
Deeds, wills and trusts that contain incorrect names.
Unpaid mortgages, judgments or tax liens.
Incorrect notary acknowledgments.
Previously undisclosed heirs with claims against the property.
A forged deed that doesn't transfer title to the buyer.
Documents executed under expired or fabricated power of attorney.
SOURCE: American Land Title Association
Pub Date: 2/14/99