By Jones Osborn II

It is almost automatic to purchase title insurance when buying real property or making a loan secured by real property. However, other situations often arise where the purchase of title insurance would be appropriate, but isn't considered simply because no one thinks about it.

Before we get into the details, however, let's take a quick look at the basics.

A standard owners policy of title insurance insures the owner of real property against four risks (subject to certain exceptions):

l. That title is vested in his name;

2. That there is no defect in or lien against the title;

3. That title is marketable; and

4. That the property has legal access.

A lenders policy, which is normally purchased in connection with the making of a loan secured by real estate, insures the lender against the above four matters, and in addition, insures the lender:

1. That the mortgage or deed of trust is valid; and

2. That the mortgage or deed of trust is prior to all other liens and encumbrances (other than those listed on the policy as being senior).

Now, let's look at some situations where title insurance may be appropriate, other than the usual sale or loan transactions:

Leases. A ground lease is one common transaction where title insurance should be considered. A leasehold estate in land can be insured just like fee title. It can be obtained either in connection with the making of a new lease or an assignment or sublease under an existing lease. A leasehold policy furnishes protection against a defect in title that might cause the termination of the lease, such as a problem with the landlord's title, the invalidity of the lease for some reason, and so on. A leasehold policy should be considered whenever substantial reliance is being placed on the validity of a ground lease--for example, when a building is to be constructed on a ground lease, or a critical parking area is being leased in connection with the establishment or expansion of a business. In such situations the loss of the leasehold can be just as devastating as the loss of fee title and should normally be insured against. However, it is normally not possible or practical to insure leases of space in a building, such as an office or store.

Easements. A standard owners policy insures that the property has legal access. In some situations, however, an additional easement or accessway is critical to the buyer's use of the property. For example, it may be important to have access for deliveries by way of a private easement to the rear of the property. In such a situation, the validity of the auxiliary easement itself should be specifically insured. There is usually no charge for this additional coverage if obtained in connection with the original policy insuring the fee.

Options. Real property subject to an option can also be insured, and normally should be. An example where insurance is wise might be an option to purchase an adjacent site for the expansion of a business. If the optioned property is not owned by the optionor or is subject to title defects, the business owner should have the protection of a title insurance policy to indemnify him against the loss. Such policies insure that the optionor has title and the title is marketable, but do not insure that the option agreement itself is valid--that determination should be made by your legal counsel. Nevertheless, an option policy does provide important protection and should be considered.

Improvements. Title insurance is limited to the amount specified on the face of the policy, which is usually adequate at the time it is purchased. However, over time additional improvements may be placed on the property, or the property may increase in value. In either of these situations, the property owner may want to consider increasing his title coverage so that he is fully protected if title proves defective.

Incorporation and Dissolution. Sometimes the owner of a business will quit-claim property to his corporation, partnership or limited liability company, or a subsidiary may quit-claim title to a parent corporation or vice-versa. Sometimes a corporation or partnership will quit-claim property to its shareholders or partners upon dissolution. What the grantor may not realize is that the title policy insures the original owner, not the new owner. The result is that the conveyance of the property when the form of the business entity changes deprives the owner of its existing title insurance protection. The solution to this problem is simple and inexpensive, however--all that needs to be done is to purchase an endorsement to the existing policy to cover the new entity, or the shareholders or partners in the case of dissolution. This is available, however, only if the ownership shares are exactly the same. For example, if a shareholder conveys property he owns to a corporation he owns only 95% of, the endorsement is not available, because the ownership is not exactly the same. Another slightly more risky solution is to convey title by a general warranty deed, so that the business entity has a claim against the grantor, which may then seek indemnity under its original policy. In any event, the situation should be reviewed to avoid creating an unnecessary title risk.

Gifts. A gift of a property by quit-claim deed raises the same issue as discussed above. An endorsement should be obtained in order to avoid loss of coverage.

Deed in Lieu. Accepting a deed in lieu of foreclosure can be especially dangerous without title insurance. It is sometimes assumed that the grantee takes title in the same condition as if he were to foreclose--that is, free of all liens and encumbrances junior to his mortgage or deed of trust. This is not the case, however. The grantee takes title subject to any additional liens, encumbrances or title problems that have attached to the property since the mortgage or deed of trust was placed on the property. Since the mortgagor is usually in financial trouble, it is not unusual to find tax or judgment liens against the property when a deed in lieu is offered. Therefore, it is critical to examine a current title report for the property before accepting a deed in lieu and to obtain a policy at the time of conveyance.

Conclusion. Title insurance provides critical and economical protection against various types of title risk. Those dealing with real estate should consider title insurance whenever dealing with any interest in real estate in order to make an intelligent and informed decision as to whether title insurance is advisable.