Owner's vs. Lender's Title Policy

Tax, SDIRAs & Cost Segregation
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Owner's vs. Lender's Title Policy

Mitch Kronowit
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes

I'm a little confused as to why someone would purchase an Owner's Title Policy. The standard line is that the mandatory Lender's Policy only covers the lender, so it's a good idea to get an Owner's Policy to cover yourself. Ok, so far?

The confusion is that any claim against the Owner's Policy would coincide with a claim against the Lender's Policy, correct? IOW, if there is a problem with the title, both the owner and lender stand to lose on the house. However, if the title is checked and a policy issued for the lender, how likely is it a claim will ever be made??? (I read somewhere $0.04 of every title dollar goes to paying claims, which still sounds super high). And if the chance of a claim being made is very low (after all, the title search/check should almost guarantee the title company NEVER has to pay a claim), is having an Owner's Policy offering any real protection???

Finally, is the necessity for and Owner's Policy (if any) proportional to the equity the owner has in the property, i.e., stands more to lose?

I'm sure I could have worded this better, but it's late and I'm tired so I'll just throw this out there for now. Thanks.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    16y

    Hi, very perceptive Mitch! You're right. If you are mortgaged to the hilt on a property your insurable interest is the amount of equity that is remaining. There is another aspect and that is the defense of claims. While you could tell the bank you're walking away in the event of a claim and force them to defend the claim, without coverage the lender or the title company insuring the lender may have grounds to seek indemnification from you in the costs of the defense since title is in your name.

    You're right in that the insurance is double dipping if a premium is charged for both the lender and the owner. In my area it is customary to provide lender coverage to the loan amount without charge and cover the owner to the sale price with a premium being charged. I never looked a gift horse in the mouth, but as I think about it, this may be a requirement from the state insurance commission, disallowing charging premiums for the same risk, I don't know, but I can see the issue. The 4% you mentioned seems low to me and that sounds like actual expense. If you have ever known someone who has made a claim, they will tell you that collecting is another matter, as they will only pay the lender and your equity, which may or may not be the face amount on the policy when it's all said and done.

    SInce title insurance insures you forever, any claim will be defended for you after you sell the property as well. But you can only be indemnified to the extent of actual damages. The only thing I can even think of off hand is that if an owner changed title from one entity to another and failed to properly convey title back or to another entity (as investors do from time to time) and such manuvers messed up the title chain, you might be at risk. But this could also be corredted by the court. In all my years I have never heard of any claim brought against prior owners. I believe most claims arise from contractors and liens, but the title insurance companies have cleaned up the standard exceptions to avoid these issues.

    The title insurance business is deeply rooted in the industry. By definition in all states, requiring financing, the seller must convey marketable titile. The requirement for marketable title is met if the title is insurable. Banks are required to have title insurance on collateral, so they require it of the borrower. It's another catch 22. You really can't self insure title without other assets to pledge. Bill

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