By Jones Osborn II

Whenever real estate is sold, it is customary for the seller to purchase title insurance for the buyer. This guarantees the buyer that he will receive marketable title to the property, that there will be no liens or encumbrances against the property, and that the property will have access to a public road. All of these guarantees are limited by (a) specific items listed on the policy, and (b) certain standard exclusions and exceptions. This is the coverage furnished by a "standard owner's policy."

If the buyer wants "extended coverage," it is customary for the buyer to pay the extra premium over and above the cost of the standard policy. The cost is normally an additional 40% to 50% over the cost of the standard policy. In addition, someone will have to pay for a current ALTA/ACSM land title survey, because an extended coverage policy cannot be issued without it.

Buyers often ask whether they should buy extended coverage. To answer that question, we first need to know what is covered by an extended coverage policy that is not covered by a standard policy.

Exclusions. A standard policy contains four exclusions from coverage not contained in an extended coverage policy. They are:

1. Rights or claims of parties in possession not shown by the public records. This mainly includes tenants with unrecorded leases, those claiming by adverse possession, and those who are in possession and claiming under some other theory (maybe they think they inherited the property from their deceased uncle).

2. Encroachments, overlaps, boundary line disputes and any other matter which would be disclosed by an accurate survey and inspection of the property. This refers mainly to buildings, fences, and driveways which go onto an adjoining property, the encroachment of such things from an adjoining property onto the property being insured, or the overlap of two parcels along a boundary line.

3. Easements or claims of easements not shown by the public records. This refers to any unrecorded easement, including one obtained by long use (called "prescription").

4. Unrecorded mechanics' and materialmen's liens. This refers to the unrecorded claims of contractors, subcontractors, laborers, suppliers, and certain professionals who have worked on the property or delivered supplies to it but who have not been paid.

When extended coverage is purchased, these four exclusions are deleted; or in other words, you have insurance coverage against these four items. That is the difference between standard coverage and extended coverage.

In deciding whether to purchase extended coverage the buyer must evaluate (a) whether there is a significant chance of a claim based on one of these matters, (b) whether he is willing to take this risk or desires to pass it on to the title insurance company, and (c) the amount of the additional premium.

Chance of Claim. In evaluating the chance of a claim covered by extended coverage the buyer must first consider the physical features of the property and its location. A survey should be carefully reviewed, if available; but in any case, the property should be physically inspected, and an aerial photo should be studied, if one can be obtained. The buyer should ask himself the following questions: Does it appear that third parties may have farmed or grazed the property, crossed over it for years to gain access to other property, or erected a wall or fence that may encroach upon it? Are there buildings or other improvements on the property, and if so, does it appear that there are people (other than the owner) in occupancy? Is an unidentified party currently using the property for farming, grazing, or any other purpose, or has anyone fenced the property off, other than the owner or his tenant? Does it appear that any improvements to the property were recently made that might give rise to mechanics' liens? Is there any improvement, such as a fence, wall, or road, that may encroach onto the property from a neighboring lot? Is the property a large tract of undeveloped land or a large commercial property? Is the property described by a long and complex legal description (as opposed to being a platted lot)? Affirmative answers to any of these questions may indicate an increased chance of a claim covered by an extended coverage policy.

Decision to Pass Risk. Whether a particular buyer desires to accept the risk of a claim covered by extended coverage depends on several factors, including the buyer's general attitude toward risk. Some buyers have a more cautious approach toward risk, and would rather pay the premium to avoid it. Institutional purchasers and trustees will usually purchase extended coverage because they are dealing with the assets of others and believe it inappropriate to take unnecessary risks, and sometimes they even have a flat policy of always purchasing extended coverage. Finally, the size of the transaction can be a consideration, because some buyers are willing to take a gamble on a small transaction, but not on a large one with the potential of a crippling loss. It is rarely thought necessary to purchase extended coverage for a typical single family home.

Cost of Coverage. As mentioned above, the cost of extended coverage is usually 40% to 50% more than the cost of the standard coverage policy, plus the cost of the survey. On a $1 million transaction, the standard coverage would probably cost about $2,400.00, and the extended coverage about an additional $1,100.00 or so. However, if the property is being purchased with a loan from an institutional lender, the lender will insist on an ALTA loan policy, which is similar to an extended coverage owner's policy. If an ALTA loan policy is being purchased, the additional cost of an owner's extended coverage policy is minimal. Therefore, you may as well get the extended coverage in this situation because it is almost free.

Conclusion. Whether a particular purchaser ought to pay the premium for extended coverage depends on a number of factors, including the physical features of the property and its location, the nature of the buyer and his approach to risk, and the cost of the additional coverage.