Title and Flood Insurance

TITLE AND FLOOD INSURANCE

By Jim “Gymbeaux” Brown, September 8, 2016

WARNING:  My opinion on this may upset a few folks but being upset does not make any less true.

Whenever you buy a home or a business or whenever you rent a home or rent a business, you should have been made aware that (1) you need either homeowners insurance on the entire dwelling or (2) renters insurance on just YOUR contents.  The same is true for buying or renting a business – INSURANCE IS CRITICAL TO PROTECT YOUR INVESTMENTS.

There are two other insurance policies that are made available to you prior to closing on a home and that is TITLE INSURANCE and FLOOD INSURANCE.

Title Insurance:  When working with buyers, they would often ask if they should obtain Title Insurance which is in fact optional for the home buyers side of the transaction.  Red flags should go up when the Mortgage Company requires in on their end of the deal and makes it optional for the buyer’s side.  I would tell each one of my buyers that I worked with and would train all my real estate agents in the training classes I taught.  If you purchase Title Insurance and NEVER need it, Title Insurance is a total waste of money  But if you purchase Title Insurance and you actually NEED it, the Title Insurance Policy is like GOLD!  Whenever it is needed, if you do not have it, you are in for a really big potentially personal financial shock.  So I would always tell my buyers to purchase it as they would any other type of insurance and almost all of them did.  Important Note:  There was nothing in it for me as a real estate agent IF a buyer purchased Title Insurance; NOTHING!  That is the way it should be!

The last several pages is probably more information that you would ever want to know about Title Insurance.  It has been three years since I was last in real estate so as warning, I have not kept up to date with any changes that might have been made so you should consult your attorney or your closing attorney to get the most current information.  Warning – it is a lot of information.

There is one more form of insurance you should be made aware of whenever you buy or rent real estate and that is FLOOD INSURANCE.  Should you get it?  Let me put it this way as I have in all of my training classes and explanations to buyers.  When you cross over the bridge that separates Mississippi from Louisiana, there is a big green and white roadside sign that reads, WELCOME TO LOUISIANA.  Translated into English that reads, YOU ARE NOW ENTERING A FLOOD ZONE! 

If you live in southern Louisiana you should purchase Flood Insurance whether your mortgage company requires it of you or not.  There are government provided Flood Maps that ascertain if your home and/or business is located in a flood prone area.  If you pay cash for a home or you inherit a home where there is no mortgage on the property, you will most likely never hear anyone suggest to you that you should purchase flood insurance except for the periodic advertisements on television.  It is exactly like Title Insurance.  If you never need to use it, the policy is a total waste of money but the day you need it, you are protected from rising waters as compared to falling rain.  Whenever waters rise to flood an area, homeowners and renters insurance policies typically DO NOT cover your contents in the home or even the repair of damage to the home and/or business.  The actual property is covered for damaged that may have been caused by heavy wind or even heavy rain falling from above BUT NOT FROM WATER THAT IS RISING UPWARDS FROM THE GROUND even though the water may have been the result of a heavy rain storm.

During the most recent rain storm that sat over southern Louisiana for 3 or more days, it has been estimated that only about 10 to 15 percent of homeowners had Flood Insurance.  Not having it surely sounds crazy to just about anyone AFTER the rains have already fallen.  But BEFORE the rains, people have been recorded as saying, “My property has never flooded in the time we have owned it and our parents before us.”  As an example, I purchased my home that is NOT located in a designated area that is subject to flooding therefore my mortgage company did NOT required us to purchase Flood Insurance but we did anyway.  At the time it was about $250.00 a year.  The Flood Maps have been redesigned and areas that were NOT included in areas that may be subject to flooding are now located squarely within a flood zone and the various mortgage companies will most likely require homeowners to purchase Flood Insurance.  Again, if you live in an areas where no Flood Insurance is required or the area has been designated as an area that typically does not flood, purchasing Flood Insurance will never be less expensive for you.  Mine is now $420.00 a year.  I gladly pay it every year because I know what rising water can do to your real estate and personal property and valuables within your home and/or business.  It can be devastating.

Here is the part that upsets me when it comes to purchasing Flood Insurance.  Like in this most recent flooding incident, upwards of 80 to 85 percent of homeowners (and probably business owners and renters alike) DID NOT purchase Flood Insurance.  Now FEMA steps in and tells these people that they can apply for FEMA assistance and it has been advertised that these 80% of homeowners WILL be covered by FEMA up to 75% of their damage.  So let me get this straight.  I purchase Flood Insurance when it is not necessary but it definitely makes good sense to do so and 80% or more DECIDE NOT to purchase Flood Insurance and Uncle Sam via FEMA will cover 75% of their losses.  What that is saying just in case you are not following this, every tax payer in America is paying upwards of 75% of damage to homes where the homeowners/renters DECIDED NOT to purchase Flood Insurance.  Therefore people such as me are paying twice – once through the annual premiums that I pay every year to cover my home and property and then again by using my tax dollars to help restore those people who failed to do the right thing and purchase Flood Insurance.  In whose book does that sound like a fair trade; certainly not mine.

I definitely feel sorry for anyone who suffered flooding but I feel less sorry for people who made the decision NOT to purchase flood insurance to protect their property in a state that is absolutely prone to flooding from all sorts of causes.  YOU ARE NOW ENTERING A FLOOD ZONE.  The government should require every homeowner and renter and the same for businesses to sign a statement BEFORE they put one item of personal belongings into a home or business that they understand that they are NOT covered for rising water on the typical homeowner’s insurance policies and before they put their belongings into their homes/businesses.  They should also be required to consult with their insurance policy carriers to make absolutely certain that they are either covered or not.  Having Flood Insurance in this area is simply the RIGHT THING TO DO!  PERIOD!

Who do you call or where do you go for Flood Insurance?  You can call 888-379-9531 or visit https://www.floodsmart.gov/floodsmart/pages/faqs/who-do-i-contact-if-i-want-to-purchase-a-flood-insurance-policy.jsp  

One very important thing you absolutely need to know.  When you apply for Flood Insurance you must wait 30 days before it kicks in on your property.  There are exceptions to this rule when purchasing a home or business and you can verify if it applies by calling the 888 number above or going to the web site above.  So if you see a hurricane forming in the Gulf of Mexico and you do NOT have Flood Insurance it is probably TOO LATE to acquire it and be covered by the time it strikes our area.

THERE YOU HAVE IT!  SHOULD YOU PURCHASE TITLE INSURANCE AND FLOOD INSURANCE?

YES!

Everything You Wanted To Know About Title Insurance

And then some!

 Title Insurance is insurance against loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. It is available in many countries but it is principally a product developed and sold in the United States. It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against someone attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders require title insurance to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance.

Why Title Insurance Exists in the United States

Title insurance exists in the US in great part because of a comparative deficiency in the US land records laws. Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government makes the determination of title ownership and encumbrances on the title based on the registration of the instruments transferring or otherwise affecting the title in the applicable government office. With only a few exceptions, the government's determination is conclusive. Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property.

A few jurisdictions in the United States have adopted a form of this system, e.g., Minneapolis, Minnesota and Boston, Massachusetts. However, for the most part, the states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid. The reason for this is probably that it is much less expensive to operate than a land registration system; it doesn't require the number of legally skilled employees that the registration systems do.

Greatly simplified, the recording system, each time a land title transaction takes place, the transfer instrument is recorded with a local government recorder located in the jurisdiction (usually the county/parish) where the land lies. The instrument is then indexed by the names of the grantor (transferor) and the grantee (transferee) and photographed so it can be found and examined by anyone who wants to see it. Usually, the failure by the grantee to record the transfer instrument voids it as to subsequent purchasers of the property who don't actually know of its existence.

Under this system, determining who owns the title requires the examination of the indexes in the recorders' offices pursuant to various rules established by state legislatures and courts, scrutinizing the instruments to which they refer and making the determination of how they affect the title under applicable law. (The final arbiters of title matters are the courts that make decisions in suits brought by parties having disagreements.) Initially, this was done by hiring an abstractor to search for the documents affecting the land in question and an attorney to opine on their meaning under the law, and this is still done in some places. However, this procedure has been found to be cumbersome and inefficient in most of the US. Substantial errors made by the abstractor or the attorney will be compensated only to the limit of the financial responsibility of these parties (including their liability insurance). The opinions given by attorneys as to each title are not uniform and often require time consuming analysis to determine their meanings.

Title insurers utilize this recording system to produce an insurance policy for any purchaser of land, or interest in it, or mortgage lender if the premium is paid. Title insurers use their employees or agents to perform the necessary searches of the recorders' offices records and to make the determinations of who owns the title and to what interests it is subject. The policies are fairly uniform (a fact that greatly pleases lenders and others in the real estate business) and the insurers carry, at a minimum, the financial reserves required by insurance regulation to compensate their insureds for valid claims they make under the policies. This is especially important in large commercial real estate transactions where many millions of dollars are invested or loaned in reliance on the validity of real estate titles. As stated above, the policies also require the insurers to pay for the costs of defense of their insureds in legal contests over what they have insured. Abstractors and attorneys have no such obligation.

Comparison with other insurance

Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance generally insures against losses caused by title problems that have their source in past events. This often results in the curing of title defects or the elimination of adverse interests from the title before a transaction takes place. Title insurance companies attempt to achieve this by searching public records to develop and document the chain of title and to detect known claims against or defects in the title to the subject property. If liens or encumbrances are found, the insurer may require that steps be taken to eliminate them (for example, obtaining a release of an old mortgage or deed of trust that has been paid off, or requiring the payoff) before issuing the title policy. In the alternative, it may "except" those items not eliminated from coverage. Title plants are sometimes maintained to index the public records geographically, with the goal of increasing searching efficiency and reducing claims.

The explanation above discloses another difference between title insurance and other types: title insurance premiums are not principally calculated on the basis of actuarial science, as is true in most other types of insurance. Instead of correlating the probability of losses with their projected costs, title insurance seeks to eliminate the source of the losses through the use of the recording system (see Recording (real estate)) and other underwriting practices. As a result, a relatively small fraction of title insurance premiums are used to pay insured losses. The great majority of the premiums are used to finance the title research on each piece of property and to maintain the title plants used to efficiently do that research. There is significant social utility in this approach as the result conforms with the expectations of most property purchasers and mortgage lenders. Generally, they want the real estate they purchased or loaned money on to have the title condition they expected when they entered the transaction, rather than money compensation and litigation over unexpected defects.

Types of policies

Standardized forms of title insurance exist for owners and lenders. The lender's policies include a form specifically for construction loans, though this is rarely used today.

Owner's policy

The owner's policy insures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those which are listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable. A title is unmarketable if it would be unacceptable to a reasonable purchaser exercising reasonable business prudence, who is informed of the facts creating or affecting it and their legal meaning, because it appears subject to material defect, grave doubt or to the likelihood of litigation. However, the title need not be bad in fact to be "unmarketable." Black's Law Dictionary 4th Ed. West Publishing Co. 1951) defining "Marketable Title" and "Unmarketable Title." The policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverages, expanded forms of residential owner's policy exist that cover additional items of loss. Examples are the American Land Title Association Residential Owner's Policy and Expanded Coverage Residential Owner's Policy.

The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverages can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state or county on this matter which is reflected in most local real estate contracts. Consumers should inquire about the cost of title insurance before signing a real estate contract which provides that they pay for title charges. A real estate attorney, broker, escrow officer (in the western states), or loan officer can provide detailed information to the consumer as to the price of title search and insurance before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy

This is sometimes called a loan policy and it is issued only to mortgage lenders. Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions.

The American Land Title Association ("ALTA") forms are almost universally used in the country though they have been modified in some states. In general, the basic elements of insurance they provide to the lender cover losses from the following matters:

1. The title to the property on which the mortgage is being made is either

• Not in the mortgage loan borrower,

• Subject to defects, liens or encumbrances, or

• Unmarketable.

2. There is no right of access to the land.
3. The lien created by the mortgage:

• is invalid or unenforceable,

• is not prior to any other lien existing on the property on the date the policy is written, or

• is subject to mechanic's liens under certain circumstances.

As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack.

Elements 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Element 3 covers matters that will interfere with its foreclosure.

Of course, all of the policies except or exclude certain matters and are subject to various conditions.

There are also ALTA mortgage policies covering single or one-to-four family housing mortgages. These cover the elements of loss listed above plus others. Examples of the other coverages are loss from forged releases of the mortgage and loss resulting from encroachments of improvements on adjoining land onto the mortgaged property when the improvements are constructed after the loan is made.

 

Construction loan policy

In many states, separate policies exist for construction loans. Title insurance for construction loans require a Date Down endorsement which recognizes that the insured amount for the property has increased due to construction funds that have been vested

Land title associations

In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy "jackets" (standard terms and conditions) for Owner's, Lender's and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not issue title insurance; they provide the policy forms that title insurers issue.

Some states, including Texas and New York, may mandate the use of forms of title insurance policy jackets and endorsements approved by the state insurance commissioner for properties located in those jurisdictions, but these forms are usually similar or identical to ALTA forms.

While title insurance generally insures owners and lenders against things that have occurred in the past, in some limited circumstances, in some states, coverage is available for certain events that can occur after a title insurance policy is issued. Most notably, coverage is now available that includes the risk that a third party may place a forged mortgage or deed of trust against a property after the owner's policy has been issued. This coverage is included in the "Homeowners Policy of Title Insurance" (a specific policy form), published by ALTA and the California Land Title Association (CLTA). Note that this is not the same as a so-called CLTA Standard Policy, which provides much less coverage than the Homeowners Policy of Title Insurance.

GYMBEAUX NOTE:  In Louisiana Lender’s Title Insurance is typically a REQUIREMENT for obtaining a mortgage on a property.  The premium for Lender’s Title Insurance in Louisiana is typically paid by the Buyer but can be paid by the Seller as may be agreed to on the Agreement to Purchase.  Also of note is that the Lender’s Title Insurance Policy usually contains more coverage than the Owner’s Title Insurance Policy.  One such example is that the Lender’s coverage includes errors that may have occurred during the survey process.  It is possible for the Owner’s to all have this coverage but they MUST both ask for the additional coverage AND pay for it.

The cost of Lender’s and Owner’s Title Insurance is calculated using a formula that most if not all insurance carriers use.  Therefore the cost of the policies are fairly standard from closing company to closing company.  However, if a Buyer chooses NOT to purchase the Owner’s Title Insurance Policy AT CLOSING and then later decides that he/she will purchase it, the cost is substantially higher.  There is a significant savings to be realized if both the Lender’s Title Insurance Policy and the Owner’s Title Insurance Policy is purchased at the same time at closing.

Purchasers of property should NEVER be discouraged from obtaining Owner’s Title Insurance.  Insurance is insurance; if needed, it is worth its weight in gold.  If it is never needed, it is a waste of money but who can really afford to take the risk?