- Florida Title Insurance: How Buyers Benefit
Coming Soon to a Closing Near You:
Title Insurance on Sale ?
By: Raymond J. Bowie, Esq.
Title insurance has always been something of a mystery. Homebuyers pay for it at closing, don't understand it, rarely use it, but many likely would not own their home without it. If they notice it at all at closing, it's only to complain about the seemingly high cost of the premium.
But due to a far-reaching decision of the Florida Supreme Court, homebuyers may want to pay more attention to what they pay for title insurance and what they get in return. That's because title insurance may be going on sale, at least for buyers who know how to shop for it.
In the landmark case of Chicago Title Insurance Co. vs. Butler (No. SC95312, October 19, 2000), the Florida Supreme Court has just ruled that the state of Florida cannot prevent title agents from selling title insurance to homebuyers at cheaper rates.
Coming soon to a real estate closing near you: Title insurance on sale?
If a buyer is now able to negotiate with his closing agent for cheaper title insurance premiums, homebuyers must first have a better understanding of the "product" they are buying.
Title insurance insures that the legal title to a parcel of real estate is "good and marketable" – which means: free and clear of any liens, defects or encumbrances that would prevent the owner from being able to sell or mortgage the property. For this purpose, title insurance policies are available to both property owners and mortgage lenders, the latter of which want it to make sure their lien on a property is valid and secure.
Title insurance policies are issued by major national or regional insurance companies called "underwriters" and sold locally at real estate closings by closing agents who double as "title agents." In Florida, these local title agents may be either attorneys or title companies. In the Naples area, the general practice is for the buyer to choose the attorney or title company to close the transaction – and in so doing, the buyer is also choosing the title agent who will provide him (and his mortgage lender) with title insurance.
Sometimes, buyers get confused between their deed and their title insurance, or ask why they need to have title insurance when they are also receiving a deed to the property from the seller. Simply put: The deed is the document that purports to convey the title to the property from the seller to the buyer, with specific warranties from the seller. But the actual title the buyer receives is generally only as good a title as the seller has to give. If the seller has defective or encumbered title, or no title at all, that's all the seller's deed will convey to the buyer. Sure, the buyer could then sue the seller for breach of whatever warranties of title were made in the deed – if the buyer could find the seller or get sufficient damages out of the seller, always uncertain propositions after closing.
Title insurance provides another recourse for the buyer who may have received defective or invalid title in a deed from a seller. Instead of a perhaps fruitless lawsuit against a long-departed seller, a property owner with title insurance makes a claim with his title insurer. First, the title insurer must provide a legal defense against any party who challenges the owner's title. And if the title actually is defective due to liens or encumbrances, the title insurer must pay off these liens or encumbrances to clear the owner's title. If the title is totally invalid and the owner is thus deprived of the property, the owner is reimbursed the full insured value under the policy, which is generally the price he had paid for the property.
Buyers often ask also why title insurance is necessary when the buyer's attorney or title company has searched all the public records and thoroughly examined the title to the property before closing. One answer, frankly, is that even the best title examiners can make mistakes. More commonly, however, problems arise from "hidden" title defects that even the most thorough examination could not detect – for example, forged instruments, undisclosed heirs, incompetent parties on previous deeds, defective foreclosures or will probates, recorder's errors, or even impersonations of parties or undisclosed spouses in prior transactions. Title insurance insures against these hidden defects as well.
This is the true value of the "product" that homebuyers receive when they pay for title insurance at closing: For payment of the one-time title insurance premium, a property owner gets legal defense of his title and perpetual indemnity against any loss to third party title claimants, continuing even after the owner sells the property.
If a buyer purchases property without mortgage financing, the buyer may decide for himself whether or not to buy an owner's title insurance policy for his own protection. But if the buyer is securing mortgage financing, his lender will surely require the buyer to pay for a lender's title insurance policy. Lenders may be many things, but they are not stupid: No lender is about to shell out many thousands of dollars to finance the purchase of a property without a title policy insuring they have a valid first mortgage lien on that property. If it weren't for title insurance, most lenders would not make mortgage loans. A lender's title policy protects only the lender, however, not the buyer. And in that circumstance, the buyer would be foolish not to get an owner's title policy as well, since the cost of the lender's "simultaneous issue" policy then drops to only $25.00.
Once title insurance is purchased, the average property owner will not, frankly, have to think about it again. When the owner goes to sell his property, he may be asked to furnish his title policy to serve as "evidence of title" for his buyer. Minor title problems may at that time also be resolved with indemnifications furnished by his title insurer to the buyer's. Outright title challenges rarely occur. But when they do, they can be disastrous, both in terms of legal expenses and loss of equity. Sometimes, it is said that peace of mind is the greatest benefit provided by a title policy – and that may be closest to the truth for most property owners.
Perhaps the most controversial thing about title insurance has always been the cost of the premiums. At closing, the title insurance premium may be one of the biggest numbers appearing on the buyer's settlement statement. And politically, rates for title premiums are a constant battleground in many states between title insurers and government regulators – especially in states like Florida, where the state has set "promulgated" or minimum rates that must be charged for title insurance.
This sets the stage for recent Florida Supreme Court decision in the Butler case.
S. Clark Butler, a Gainesville developer, brought suit against a major national title insurer who refused to negotiate with him the premiums he was forced to pay for title insurance in his developments. He claimed he should be able to negotiate a discount or rebate for the volume of title policies he paid for on lots in the same subdivision. His title insurer refused to negotiate reduced or rebated title premiums, referring to Florida statutes that made it illegal to charge anything less than the state-promulgated premium rates. Mr. Butler claimed that Florida's "anti-rebate" laws fixing title insurance premiums were in violation of the Florida Constitution.
On October 19 th, the Florida Supreme Court agreed. Here's what the Court said:
" Butler… argues that the anti-rebate statutes infringe on a citizen's right to bargain or negotiate for insurance rates, thereby violating his substantive due process rights under Article I, Section 9 of the Florida Constitution…. We find that the anti-rebate statutes do infringe upon a citizen's property rights and unconstitutionally restrict a citizen's rights to freely bargain for services…. For these reasons, we declare the anti-rebate statutes, as they relate to a title agent's ability to negotiate a portion of his or her share of the risk premium, to be unconstitutional."
This means that now in Florida, parties paying for title insurance will be able to negotiate with their title agents for reduced rates or rebates on the agent's 70% portion of the premium.
The new marketplace has yet to take shape. Since buyers in the Naples area generally select the closing/title agent, it will initially be up to those buyers who wish to exercise their "Butler rights" to inquire with their closing attorneys or title companies – and as with everything else, to shop around for the best deal on both price and service.