My offer on a REO was rejected as too low - the issue with the townhouse is listed at (1)"system did not hold pressure due to damages, unable to find source of allleaks, water heater damaged at side where TPR valve damaged" and (2) "Water Supply and Sewage system was inspected for presence of obvious visible defects.

The service they offer is title insurance, which insures that the title to a specific property is free from defects and nobody but the buyer has claim to the property.  

My insurance is claiming that if the battery was a defect that they will not cover the damage cost that the apartment complex will charge for the repairs.

Odds are the property may have title issues, and if you close on it you will soon be responsible for those title defects if you don't get them cleared by an attorney prior to closing.

The SRPD asks about defects the seller "should know" about.  

This particular situation depends on the language of the inspection clause....either you have to show there is a major defect, or as is more common, like most standard Realtor As Is contracts, you may cancel for any, or no, reason at all during the inspection period.

A track lighting fixture may be one of the cases where an LED bulb in an existing fixture, may be the better choice over integrated, non-removeable LEDs, as they are not behind a shroud to hide a defective diode.For comparison purposes, I have had two of the larger integrated LED fixtures listed a over, and five of the smaller integrated fixtures listed above installed for two years at my home, and have yet to notice a single LED failure.

Investors generally want to pay for direct labor and direct materials and not pay for the contractor risk (OSHA, aebestos, LNI, litigation, construction defect risk management, lead based paint, surprises, injuries, etc.) 

__________________________________________________________Yes _________________________________________________________water heater was inspected for rust and visible defects and it appears new_____________________________________ Water heater functional?

What is the defect or problem?