What Are the Repercussions of Filing a Title Insurance Claim?

Question

All:I've recently purchased a property in Columbia, South Carolina that I thought was three legal units; a duplex with a detached guest house. The Zoning department is now saying that the guest house is not to be rented or lived in as it was never permitted when it was converted from a garage 12 years ago. Essentially it is not "grandfathered in" because it was "illegally" done at the time.Some additional background:All three units were occupied when I purchased the property.The seller owned it for 32 years and did not fill out a property disclosure. A survey was done on the property prior to closing.The reduction in value of the property without the guest house is ~50k-75k.The deal and project is a grand slam with the guest house. It's still a solid deal/project without it, however.I was referred to a Zoning attorney to help get this resolved and he thinks that is highly unlikely. He does think, though, that I may have a title insurance claim on it. I have a very good relationship with my closing attorney (separate person) and do not want to harm that as we have worked together for 12+ years. My closing attorney performed the title search, so my question is this:What are the repercussions on her and/or her premiums if I were to file a claim?

Wayne Brooks · Answer

Your only repercussion will be a quick denial. I find it hard to believe an attorney suggested this would be a title insurance issue. Title insurance guarantees clear Title, not zoning compliance, legal or illegal additional units, non permitted work, etc. You don’t have a Title problem.

Tom Gimer · Answer

@Will Gaston @Andrew R. LucasAddressing the second question... filing a claim will require the closing attorney to turn over the file to the underwriter who will then analyze it along with all available info to determine whether anything was missed. If this was the closing attorney's fault (doesn't sound like it), then the title insurer would advise the closing attorney to put his/her E&O carrier on notice and ultimately if there was liability it would likely fall on E&O.That's the most common scenario. But let's say your title attorney did a title bring-to-date close to the date of the settlement and all was clear... and then the violation was recorded "in the gap" before your deed went on record. In that event the liability would likely fall on the title insurer. Good luck!

Tom Gimer · Answer

@Wayne Brooks Actually, violations concerning occupancy, building and zoning can be covered... but the notice/violation must be recorded in public records for there to be coverage. How else would title be aware of such an issue?OP will want to review Covered Risk 5 in the owners title insurance policy.

Chris K. · Answer

@Will Gaston & @Andrew R. LucasTo follow up on what @Tom Gimer wrote, all these underwriters provide these closing attorneys with guidelines to follow. Having seen this happen on the back end, the underwriters will try to see if the closing attorney failed to take certain steps. If they did, then the title insurer may try to recoup the money from the closing attorney. That said, the insurer has a business relationship with these closing attorneys as well. For example, if the attorney has pumped a ton of business to the insurer, the insurer wouldn't want to burn the bridge over periodic mistakes. So oftentimes they amicably settle even if the closing attorney "messed up." Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Andrew R. Lucas · Answer

Curiosity... Does anyone know what are the repercussions for the closing attorney if @Will Gaston were to file a claim? Would that have any affect on the attorney? Or does it simply stay between the title insurance company and buyer?I'm very interested in this outcome... I just recently backed out of a deal with the same issue. Tenant in the 3rd unit was not permitted. Luckily, the zoning inspector left a note on the door the day before we went for due diligence. Would have been a $50,000 hit to our value had we purchased.

Wayne Brooks · Answer

@Tom Gimer Yes, a recorded code violation type lien would be an issue....I was assuming nothing recorded....totally out of reason to expect that kind of research, since this violation was not even known by the zoning officials. Falls into a due diligence issue for the buyer.....garage converted with no permits and I assume the property was listed as 2 units on local records.

Carl Fischer · Answer

@will Gaston @Will Gaston It is hard to fight title companies. A title company missed a recorded easement on my stairwell in my building and still said it wasn’t covered -title companies are very hard to fight for coverage.

Michael Lee · Answer

Do you have a copy of the owner's title insurance policy? If so, I'm sure you read through it, but maybe it will also address whether there is a responsibility on the closing attorney since you're also concerned about that

Jay Hinrichs · Answer

Yes I was going to Ping Tom as well.my gut says not covered..

Andrew R. Lucas · Answer

Thanks @Tom Gimer and @Chris K. Both very insightful. I hope to not have to go down this road, but nice to know how it looks if the scenario ever arises.