The Importance of Receiving a Title Insurance Policy When Purchasing Property

When purchasing property, a buyer needs absolute assurance that the seller has good title to the property and is able to transfer good title to the buyer free and clear of all liens and encumbrances, such as mortgages, judgments, unpaid taxes, and the like. The most commonly used method of providing such assurance in Wisconsin is the title insurance policy.

A title insurance policy is a contract whereby, for a stated premium, the title insurance company agrees to compensate the policy holder (the buyer) for specified losses relating to the title to the real estate which the buyer is purchasing.

The process of obtaining title insurance involves two steps. The first is the title commitment and the second is the title policy.

The title insurance commitment, sometimes referred to as a preliminary report or a binder, is the information showing the status of title to the property before closing. The commitment also indicates under what terms the title insurance company will issue a title insurance policy after the closing and what the scope of that insurance will be. The coverage in the final policy will depend upon to what extent the requirements of the commitment were complied with and which title insurance exceptions were removed from the commitment.

It should be made clear that the fact that a buyer receives a title insurance policy when he/she buys property is not an absolute guarantee that the title is good or that the buyer will be protected if the title is encumbered. Only by reading and understanding the legal implications of the exceptions listed in the title insurance commitment and in the policy can one determine whether the buyer will receive good title to the property and be adequately protected against title defects. It is normally the responsibility of the buyer’s attorney to review the title insurance commitment and make a determination as to the acceptability of the title insurance commitment and policy following closing.

In addition to making certain that the requirements of the commitment are met and that the title company will agree to remove exceptions from the title policy issued to the buyer after the closing, another very important factor which must be considered is the "gap" or timing between the date of the issuance of the title insurance commitment and the closing. In many cases, a title insurance agent will issue a commitment several weeks before the closing. During the period of time following the issuance of the commitment and the closing of the transaction, it is possible that the owner of the property could mortgage the property, have a judgment taken against him or her which would constitute a lien on the property, or even sell the property, all unbeknownst to the title company and the buyer. The way to protect against such action is to require what is known as a "gap" endorsement which covers the period of time between the date of the title insurance commitment and the recording of the deed. This endorsement may be provided by some title companies at no charge; however, usually, a charge of between $50 and $100 is common for a gap endorsement. To receive a gap endorsement at the seller’s expense, the buyer should insert language in the offer to purchase which states that the title insurance to be provided to him/her will include a gap endorsement at the seller’s expense.

Following the closing, the title insurance company will issue the title insurance policy. Usually the title insurance policy is not issued for a period of several months following the closing. When the title insurance policy is issued, the buyer’s attorney should review it to make certain that all of the exceptions that the title insurance company agreed to remove have in fact been removed and that all of the requirements, such as satisfaction of mortgages, payment of taxes, and the like have been taken care of. The buyer or his/her attorney should, however, verify and confirm this with the closing agent at the time of closing so that there are no surprises when the buyer receives the final policy.

This column is based on general principles of Wisconsin law, is for informational purposes only, and is not intended to provide legal advice. Each legal matter must be judged on the merits of its unique circumstances. If you have a legal problem, consult an attorney.

Jim Smith is an attorney at Pinkert Law Firm LLP with offices in Sturgeon Bay and Sister Bay. 920.743.6505 or 920.854.2616.