When closing on property, hiding somewhere in a small forest of paper is an important contract that allows for owner’s title insurance coverage that is typically paid for by the seller.
Surrounded by a team of professionals ranging from realtors, attorneys, title company representatives and loan specialists, most investors feel comfortable that due diligence by all of these parties will guarantee a positive outcome. This is usually the case. But what happens when the investor later improves or develops the property, or transfers the title to a different entity?
“It’s a problem that we’re seeing more and more,” says Kent Ihrig, partner and chair, Real Estate Practice Group, Shu-maker, Loop & Kendrick LLP. “Many property owners don’t realize that the title coverage they received at closing doesn’t protect a new entity or a new owner.”
Smart Business spoke with Ihrig about related party transactions and why they may compel a property owner to revisit their original title insurance policy.
What related party transactions could adversely affect a titleholder?
Many people purchase property in their own name, individually, and later decide to develop it, bring in an investor, set up an LLC, or transfer it in another manner perhaps to a family member. Conversely, an investor might dissolve or distribute the property from an LLC or a corporation.
Often, owners do not consider that their original owner’s title insurance policy does not follow them to the new entity. It protects them while they own the property, but it does not protect the new entity or the new owner. There may be some basis for the new owner, including their own entity, to go back against them on a breach of a title warranty and thereby make a claim on their policy. However, the new owner has no direct protection from the title insurer.
How does title insurance mitigate the effects of these related party transactions?
The owner’s policy of title insurance provided by the seller at the time of sale ensures that the title is indeed vested in the owner, and it also ensures that it’s not subjected to any liens other than those listed in the policy. Hazard insurance insures against something that may happen in the future while title insurance is always looking at the past.
Title insurance is only insuring the title and the property up to the date it was acquired. So if something that arose in the past or something that the title company missed like a mortgage that was never satisfied causes someone to start fore-closure proceedings against you, you could go back against your title insurance.
Additionally, when owners quit-claim their interest in a property to another entity, or a son or daughter, perhaps, the title coverage doesn’t carry forward to the new owner. This creates financial exposure in a number of areas, especially if the property’s value has increased significantly from the original purchase price listed on the owner’s title insurance policy.
Why should property development or improvements, or refinancing, prompt a title insurance review?
Typically, when you buy property, you obtain title insurance for the purchase price. If your property appreciates in value or you develop or improve the property so that it causes an increase in the value, unless you purchase an endorsement to your policy at the time you increase the value, you’re not covered on that increased value. If there is a title claim and the owner has not obtained an increased amount of title insurance, he or she is confined within the limits of the original policy. This could be a costly mistake. For example, when an investor purchases a vacant or undeveloped beachfront property for $1 million and later develops it, bringing the value up to $4 million, the original owner’s title insurance policy for only $1 million leaves a large area of exposure. If a title claim occurs, or if there was a total failure of the title where the title was never vested the way the title company said it was the title insurance policy would only pay up to $1 million, the original limit of the policy.
Can a thorough title search replace owner’s title insurance?
No. A pure title search does not replace or provide the same protection as a paid title insurance policy and regular endorsement upgrades. In a rising market, owners should consider revisiting their title insurance policy every two to three years, or about every five to six years in a stable market.
Can Florida property-owners select from different title insurance providers?
Yes. Title insurance providers are private insurers. Florida’s Office of Insurance regulates their products and rates. There is some competition. Many title insurers offer what’s known as a Butler Rebate, where they rebate a portion of the agent’s premium to the purchaser of the policy. While title insurance prices are minimum promulgated rates set by the state, the agent’s portion of the premium is negotiable, allowing for competition between agents.
KENT IHRIG is a partner in the Real Estate and Corporate Practice groups with Shumaker, Loop & Kendrick LLP in Tampa. Reach him at (813) 227-2354 or firstname.lastname@example.org.