Title Insurance – What Does It Cover?

Title insurance is required in most purchases of real property, but what does it cover?  What losses can a property owner suffer that should be submitted to insurance?  The answer is a bit of a cruel joke among real estate attorneys — Title Insurance does not cover a great deal.

The Court of Special Appeals recently issued a decision in Back Creek Partners v. First American Title – a case which the court helpfully described as “about title insurance, specifically what it does and doesn’t cover.”   The underlying dispute involved issues in the Annapolis neighborhood of Harbor View, a ten home subdivision on a beautiful section of Spa Creek.  Not coincidentally, the question of the appropriate location of an access easement from the lots to the pier has been in litigation there for many years.  It may be the most litigious neighborhood in Maryland.

Back Creek, the developer that purchased, subdivided and created a plat denoting a waterfront access easement, sought to recover its litigation costs from First American Title Insurance Company.  The insurance was supposed to cover any loss or damage incurred if: 1) title to the estate was other than described in the policy; 2) any defect or lien or encumbrance on the title; 3) unmarketability of title; or 4) lack of a right of access to and from the land.  On first read, one might think that there would be coverage for a years-long dispute about the correct location of an access easement which also raises the question of who actually owns what parcel of land.  Not so.

When Defendant Back Creek sought reimbursement for attorneys’ fees incurred defending itself against a lot owner, First American moved for judgment on the basis that 1) the policies had expired; 2) that there was no coverage for the claims; and 3) that they did not receive timely notice of the claim.  These arguments were successful in the trial court.

The Court of Special Appeals ultimately upheld this decision, ruling that the claims made by the homeowner did not fall within the scope of coverage.  “Title insurance in general is meant to protect title to property as it existed at a particular time; these title policies in particular covered claims relating to the title that Back Creek obtained when it bought the property and the titles that it passed to the Harbor View neighbors.”  The case brought against Back Creek did not raise issues about whether there was good title to the real estate, and there were not allegations of a “defect in Back Creek’s title or the titles it conveyed to the Harbor View residents, nor any liens or encumbrances that hadn’t been disclosed.”

The court went on to note that the policy conditions provided coverage only “so long as the insured retains an estate or interest in the land … or so long as the insured shall have liability by reason of covenants of warranty made by the insured.”  In this particular case, Back Creek sold the lot a person, and that person sold the lot to the buyer that sued Back Creek.  Once the second transfer occurred, the court held that this severed Back Creek’s obligations to warrant title, and so even though they were sued, they could not recover their attorneys’ fees from the title insurer.   The Court did emphasize that a title insurer is required to defend a case “if any claim raised by the insured potentially falls within the scope of the policy.”  That was not the case for Back Creek, however.

So what does title insurance cover?  The classic case is where you purchase a property from a person that has a deed, then later another person comes forward with a deed to the same property.  If the other deed is valid, and it is based on a transfer that occurred prior to your chain of title, then you did not actually purchase the real estate because your seller did not own it.  Your losses should be covered by title insurance.  Similarly, if it turns out that there is a prior mortgage or other lien against the property that was not known at settlement, resolving that claim would be covered.  Finally, if it turns out that a piece of property does not actually have access — such as a flag lot where the access strip did not really convey — this should be covered.

A word of caution, however.  It is not infrequent that one person purchases the property with title insurance.  Then, they later transfer the property to an LLC that they own or a family member, and no title insurance is obtained.  Just as in the Back Creek situation, the second transfer likely voids any title insurance.

If you have an issue that may be covered, it is wise to submit the potential claim to the title insurance company as soon as a possible.  Look carefully at whether the Plaintiff alleged claims that may be covered.

Good luck, be careful, and if you need a solid opinion on your rights under a policy, consult a good attorney.

J. Dirk Schwenk is cum laude graduate of the University of Maryland School of Law, and is active cases involving real estate, riparian rights, and vessel purchase issues.  He can be reached at dschwenk@baylawllc.com or 410 775 6805.