By Jones Osborn II

There was a time when real property was almost always sold by General Warranty Deed. The General Warranty Deed requires the seller to guarantee the buyer good title against almost every kind of title defect. In recent years, however, many sellers have refused to give a General Warranty Deed. Instead, they offer a Special Warranty Deed, telling the buyer to rely on the title insurance policy for his protection.

Before a buyer accepts this proposition, however, he should know what a Special Warranty Deed is, what title insurance covers, and what additional risks, if any, he is taking by accepting a Special Warranty Deed.

Special Warranty Deed. A Special Warranty Deed is a deed saying that the seller warrants title against "the seller's own acts and no other." This odd-sounding language means that the seller guarantees good title only against defects that he himself caused. For example, if there is an invalid deed in the chain of title, the seller has no responsibility unless he himself is responsible for the invalid deed. If the title defect is caused by someone else, the seller has no responsibility, and the title defect is the buyer's problem. On the other hand, if the seller has conveyed title by a General Warranty Deed, the seller is responsible for guaranteeing good title regardless of who caused the title defect.

In the seller's view, the Special Warranty Deed seems perfectly equitable, because he doesn't want to be responsible for things he didn't cause. Besides, the seller figures he is paying the cost of title insurance for the buyer's protection, and that ought to be enough to satisfy the buyer. The buyer, however, is paying for good title and doesn't care who caused the defect. He figures if he's paying for clear title, the seller ought to be responsible for delivering it one way or another. After all, the seller is getting paid in good funds -- why shouldn't he deliver good title?

Title Insurance. As mentioned above, the seller often justifies the Special Warranty Deed by telling the buyer to rely on his title insurance policy. That's not always a completely satisfactory answer, however. Here's why:

1. A standard owner's policy of title insurance does not cover certain types of title defects, such as rights obtained by adverse possession or prescription, rights of tenants in possession, unrecorded mechanic's and materialmen's liens, or anything that would be disclosed by a survey. A General Warranty Deed generally does cover these matters, so that the acceptance of a Special Warranty Deed together with a standard owner's policy of title insurance still leaves the buyer with less protection than he would get with a General Warranty Deed and a standard policy. In other words, with a Special Warranty Deed the buyer has no protection against anything excluded from the policy unless it was caused by the seller. This problem can be cured by purchasing an extended coverage policy of title insurance which does cover most such excluded matters -- however, the cost is rather steep (usually twice the cost of a standard policy), and the prevailing Arizona custom is for the buyer to pay the additional cost. Therefore, the buyer is often faced with the quandary of choosing either to accept some title risks or to pay the premium for extended coverage.

2. Recovery under a standard policy is limited to the face amount of the policy, which is generally the purchase price. This is usually sufficient to cover the buyer's loss. However, in some cases it is not; for example, when the property is purchased at a bargain price. The seller's duties under a General Warranty Deed generally require him to indemnify the buyer for his loss, which is not necessarily limited to the purchase price. Thus, reliance on the policy of title insurance could provide an inadequate recovery.

3. A title insurance policy, even with extended coverage, may exclude certain items covered by a General Warranty Deed. A title policy, for example, excludes title defects known to the insured, while a General Warranty Deed under some circumstances does not. While this may not seem important on the theory that no one would buy property with a known defect, remember that it is quite possible that the buyer may have known of the defect prior to closing but did not appreciate or fully realize its significance. In such a case, the protection offered by a General Warranty Deed could be valuable.

4. There is always the possibility, however slight, that the title insurer could become insolvent, leaving the buyer with only minimal protection offered by the Special Warranty Deed. While this possibility may seem remote enough to ignore, remember that the same thing was once thought about savings and loan institutions, life insurance companies, and many other financially troubled enterprises. Therefore, there is always a slightly greater element of risk if one relies only on title insurance for his protection.

There is obviously little to be gained from a General Warranty Deed, however, if the seller is not strong enough financially to honor his warranty. In cases where there is a seller carry-back, the buyer may be able to offset his claim under the Deed against the amount he owes the seller. In other cases, however, it may not be worth the effort to insist on a General Warranty Deed if it appears that the seller will be unable to honor his warranty.

Conclusion. When deciding whether to accept a Special Warranty Deed, a buyer must consider many factors, including the likelihood of uninsured title risks, the solvency of the seller, whether there is a seller carry-back, the cost of extended coverage title insurance, and the relative bargaining position of the parties. There is no uniform "right answer" -- each transaction must be negotiated on its merits with a full and informed appreciation of the relative risks.