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 [email protected].