DAVID J. WILLIS ATTORNEY
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Title insurance is available in Texas to protect owners and lenders from loss resulting from defects in the title to real property. Title insurance policies and regulations are a highly complicated and evolving area. This article is designed only as an introduction. Further information may be obtained at the websites for the Texas Land Title Association (www.tlta.com) and the Texas Department of Insurance (www.tdi.state.tx.us).
Closing at a title company that issues a title insurance policy to both buyer and lender is the usual way to do real estate business in Texas, but it is not the only way. Closings can occur without title insurance – for example, at a lawyer’s office or even at the kitchen table of one of the parties. There are good reasons, however, that obtaining title insurance is customary:
(1) The title company maintains a database of real estate documents that can be searched in order to produce a “title commitment,” an important part of the pre-closing process. More details on this below.
(2) The title company acts as a clearinghouse for closing documents that need to be signed and recorded, as well as for funds that need to be collected and disbursed at closing. The “closer” is the contact person who assembles the file (which is assigned a file number or “GF number”), prepares the HUD-1 settlement statement, and supervises the execution and notarization of documents on the day of closing.
(3) The title policy provides an avenue of recourse and recovery in the event either the lender or the buyer later sustains a monetary loss as a result of defects in title. What kind of monetary loss? Well, suppose the title company missed a valid lien and the lienholder comes to collect; or suppose there is a previously unknown heir who suddenly appears and claims an interest in the property. The title company will work to resolve such issues or will, if appropriate, pay compensation. In this sense, a title company is like any other insurance company.
The Title Commitment
The title commitment is produced after the title company has received a copy of a signed sales contract and a check for the earnest money. The commitment reviews the status of title, lists title issues and defects (if any) that need to be cured before closing, and states any other pre-conditions to issuance of a policy.
The commitment also shows existing liens, and the title company routinely requires release of these. Other miscellaneous requirements may apply, such as a marital status affidavit to clarify the seller’s marriage status, a “not-same-name” affidavit if there is a judgment in a name similar to that of the seller, and the like. If there are more serious issues like mechanic’s liens, judgments against the seller, tax liens, lawsuits affecting title to the property, heirship issues due to a previous owner dying without a will, or gaps in the chain of title, the commitment will indicate what these are and what must be done if title is to cleared (i.e., be made insurable in the name of the buyer).
Role of the Earnest Money Contract
The title company’s duties commence when it receives the executed sales contract and a check for the earnest money. For residential transactions, the standard sales contract TREC 20-8 (One to Four Family Residential Contract – Resale) is often used. Paragraph 6, entitled “Title Policy and Survey,” applies. Although it is customary for the seller to pay for the title policy, this is not required, and paragraph 6 provides the opportunity to check the buyer as the paying party. The title company has 20 days to produce the commitment, with an automatic 15 day extension if needed.
Paragraph 6.D. provides a blank for insertion of a time period during which the buyer may object to issues raised by the commitment. This is usually 7 to 10 days. If the buyer does not make timely objections, any such issues are waived. Despite buyer’s waiver, however, the title company can still insist that Schedule C items be cured before a title policy will issue. It is, after all, the title company’s liability that is on the line. If the buyer timely raises objections, then seller must cure them or the contract terminates.
Note that even though the TREC contract is a so-called “standard form,” it can be customized by a real estate lawyer to favor one side or another – although brokers almost never reveal this for fear that an attorney will delay or complicate the transaction. Attorneys can alter the text of TREC contracts to suit the circumstances and their clients’ interests; brokers and agents can only check boxes, fill in blanks, and attach appropriate addenda. See our companion article on this site entitled Texas Residential Sales Contracts.
Policies of Title Insurance
Two policies are usually issued: one for the buyer (the T-1 Owner Policy of Title Insurance) for the sales price of the land and improvements, which remains in effect so long as the new owner retains an interest in the property; and one for the lender (the T-2 Loan Policy of Title Insurance, formerly called the “Mortgagee Policy”) for the value of the property or the amount of its loan, whichever is less. This policy terminates when the loan matures and the four-year statute of limitations for foreclosure on the lien expires. You will not get a loan on Texas real estate from an institutional lender without a loan policy . . . so plan on using a title company if the buyer is borrowing purchase money from a bank. A private “hard money” lender may do it without title insurance, however (That market is less regulated and highly variable).
Remember, an owner title policy is not required by law. It is always possible to do a title search, or obtain a title report or abstract of title – thereby providing a comfort level regarding the status of title, the absence of liens, and the like – and then proceed on that basis. Many buyers and sellers do just that and move forward to close their deals. In fact, savvy investors learn how to do their own informal title searches at the courthouse, consult with their attorneys about what they find, and thereby reduce total closing costs.
Title Insurance Rates
The cost of title insurance is set by the Texas Department of Insurance, which regulates this industry pursuant to Title XI of the Texas Insurance Code (the “Texas Title Insurance Act”). The form of a title insurance policy and the various available amendments are prescribed. The basic premium for a $100,000 policy is currently $843, which is a one-time fee for coverage that lasts as long as the buyer has an insurable interest in the property. A formula applies for amounts higher than that. Hearings on rate increases occur biennially in even-numbered calendar years. Further information is contained in the Texas Title Insurance Basic Manual which can be found at www.tdi.state.tx.us/company/titleman.html.
It is customary in Texas for the seller to pay the cost of the owner’s policy. However, this is negotiable. It is all a question of price.
Differences Between Title Companies
Since rates are regulated, there is nothing to gain from shopping title companies for the cheapest policy. Title companies do, however, vary in at least two significant respects: first, the level and quality of service they (or a particular closer) provide; and second, their willingness to “insure around” certain potential defects or insure non-standard transactions (wraparounds, trusts, and the like). Title companies are by nature conservative institutions that are averse to risk. If a company refuses to do a transaction, or sets out requirements that are difficult or impossible to satisfy – and this happens – then it may be necessary to shop title companies until one is found that is willing to do the more creative deals.
Note that some law offices enter into an arrangement with certain title underwriters to act as “fee attorneys,” meaning that these attorneys can close transactions in their offices and issue title policies as an agent for the underwriter. While this may seem convenient, prominent real estate attorney Chuck Jacobus and others argue that it is a conflict of interest – that the lawyer’s job is to advocate for the buyer or seller, not act as neutral escrow officer in order to collect insurance premiums and fees. The interests of buyers and sellers differ – sometimes immensely. Real estate documents can often be highly customized to favor one party or another. Trying to represent everyone usually means that no one gets adequate representation. While this office reviews and cures title issues, it does not act as agent for any particular title company.
Exclusions and Exceptions to Owner’s Coverage
As with any insurance policy, there are exclusions and exceptions. The residential owner’s policy expressly excludes such items as building and zoning ordinances; condemnation; title problems created by or undisclosed by the insured, or arising from fraud by the insured; title problems that result in no actual loss; access issues; refusal of anyone to lend money; and physical condition of the land.
Exceptions are specific limitations on coverage. These include the so-called standard printed exceptions on Schedule B – restrictive covenants and deed restrictions; the survey exception (“discrepancies, conflicts, or shortages in area”) which can be deleted for a fee; homestead, community, and survivorship rights; the exception for riparian rights, water-rights, and tidelands; the tax exception, including rollback taxes; the mechanic’s lien exception; the exception for leases and subordinate liens; the rights of parties in possession; and, if there is no survey, easements and encroachments. The title company may also add “special exceptions” that it deems necessary after examining title to the property.
Note that title companies do not insure fraudulent conveyances or “preferential” transfers (ie., transfers made to avoid payment of creditors that can subsequently be set aside by a judge). Excluded is “any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A is (a) a fraudulent conveyance or fraudulent transfer; or (b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.”
The Title Company’s Duty to Defend
If an unexcepted title defect or lien appears, the title company must investigate and then:
- commence legal proceedings to clear title;
- indemnify the insured pursuant to the policy;
- reinsure the title to the property at current value;
- indemnify another insurer if another company does the reinsuring; or
- cure the defect or obtain a release of the lien.
If the title company does not take one or more of the above actions, it can be sued by the insured for breach of contract. Note that the company’s duty to defend is contingent upon the insured providing timely written notice of the defect or lien. The duty to defend is not triggered by claims of money and the like that do not constitute a true cloud on the title.
Recovery under an owner’s policy is limited to the owner’s actual money loss or the amount of the policy, whichever is less. The insured must give the title company prompt notice and cooperate in furtherance of the claim. The old requirement that the policy itself be produced in order to recover has been eliminated. Payment must be made by the company within 30 days of determination of liability and the extent of the loss. If the title company settles a covered claim, it is subrogated to the rights of the insured as to that claim (ie., it assumes the insured’s right of recovery).
Title to minerals and mineral rights are generally excepted to under Schedule B of the policy. Title companies have traditionally taken the view that the job of determining title to minerals belongs not to title insurers but to landmen and oil and gas attorneys – although the title company will provide copies of mineral leases and conveyances if a buyer or the buyer’s attorney wishes to review them prior to closing. Since the minerals in producing regions have usually long-since been conveyed away (especially in the typical urban residential setting) the sole concern of a homeowner is use of the surface of the land (the “surface estate”) by a mineral-interest holder to gain access to the minerals. Optional endorsements are available which will protect against damage to the surface estate. The Texas T2-R already protects lenders against such surface damage. This is an evolving area currently under review by the Department of Insurance.
Community Property and Heirship Property
Texas is a community property state and, as such, all property acquired by either spouse during marriage is presumed to be community property. It is therefore common for the title company to either require joinder of a seller’s spouse on a deed or, in the alternative, a marital status affidavit and/or a non-homestead affidavit.
If someone in the chain of title died without a will, you can also be sure that the title company will require a conveyance of some kind (usually a special warranty deed) from each and every heir and, if an heir is deceased, from the heirs of that heir. Alternatively, the title company may be satisfied with an affidavit of heirship, if there are no other heirs and the circumstances of family history can be sufficiently well established. It can get complicated and expensive to cure defects in heirship property.
Obtaining title insurance in Texas is customary and useful for many good reasons. However, a buyer is not required to obtain such a policy. Consult an experienced real estate attorney at the beginning of the process, before you sign anything (including the earnest money contract), and allow your attorney to guide you through closing.
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.