I’m paying for a policy for the lender. Do I have to buy an Owner’s policy as well?

October 19, 2014

Most lenders on real estate transactions will require as a condition of closing that the borrower purchase a lender’s policy of title insurance in the amount of the money borrowed.  Then, at closing, the title insurance agent will inquire: “Do you want to buy owner’s coverage?”

Now, the annoyance of the buyer/borrower is understandable in such circumstance.  As a part of the closing, he is getting hit from all sides for expenses relating to the closing: lender fees, property inspection fees, surveyor fees, and closing costs.  The buyer reasons (i) if I am already buying “lender” coverage in the amount of the mortgage and (ii) this is not required, let’s save the money!  Further, the buyer has the assurance that someone indeed has “checked” the title before the closing, so what possibly could go wrong?

The primary problem is that if an owner does not buy an owner’s policy of title insurance, a buyer has no coverage whatsoever.  Here’s why:

  1. A lender’s policy covers the lender only.  It is a less expensive policy, and benefits only the party to whom it is written, the lender.  Further, that policy only kicks in if and when the borrower defaults in his obligations to the lender.  Finally, and this makes things worse, if the title company does cover the lender for an insured loss, they could become the owner of the note and mortgage from the borrower, and can pursue collection on that note even after the lender has been made whole.  Stating this principle a second time: If an owner does not purchase owner’s coverage, he has no title coverage.
  2. The owner has no claim against the closing agent or attorney for a bad title without an owner’s policy.  The assumption of a buyer at a real estate closing is frequently that “hey, I paid to have the title checked, I am entitled to know I have good title.”  Well, that’s the point of an owner’s policy of title insurance.  Without getting some written assurance at closing to the owner that title is clear, the owner has no such assurance.  If things go haywire after the closing, the buyer will have no third party indemnity to cover the title problem.

There is one saving grace against title problems that buyers frequently will still enjoy without an owner’s policy: The covenants under a deed of conveyance.  Typically in a residential transaction, the seller will convey title to the property by a deed of general warranty.  Such a deed contains broad promises from the seller that title is free, clear and unencumbered.   In commercial transactions, the deed may be a deed of limited warranty covenants (a promise against title problems caused by the seller only) or a quit claim deed (no title covenants at all).  Thus, after closing, if a title problem arises, the buyer may be able to recover from the seller for title defects.  The weakness to this strategy is that the buyer may be insolvent, be deceased or simply have disappeared when the title problem emerges.

So, yes, we recommend an “owner’s policy of title insurance” for each buyer, residential and commercial.  It is in your interest to purchase this coverage.

Read other tips about title insurance coverage by clicking the links below:

Why title insurance?

Common title problems

Don’t just buy a title insurance policy; read the policy

How title insurance can get your transaction closed

Title insurance — a one time premium for a lifetime of coverage