Unlike other types of insurance that protect you against things that might happen in the future, Title insurance protects you from events that happened in the past. It protects the buyer and the lender (if there is a mortgage) from claims and financial loss due to defects in the Title.
What is a Title defect?
There are two parts to a Title insurance policy:
The Owner's policy benefits the new owner (buyer) by assuring that the Title to the property is free from all defects, liens and encumbrances, except those listed as Exceptions in the policy or are excluded from the Owner's policy coverage. (You'll want to review this list of Exclusions.)
It also covers losses and damages suffered if the Title is unsellable. The Owner's policy also provides coverage for loss if there is no right of access to the land (the land owners surrounding your property will not let you cross their land to access your property) or if there isn't an easement to your property. These are the basic items that most Title insurance covers. You can purchase additional coverage.
The liability limit of the Owner's Policy is typically the purchase price paid for the property. As with other types of insurance, coverage can also be added or deleted with an Endorsement. The premium for the Owner's policy is usually paid by the seller. Title insurance coverage lasts as long as the buyer retains an interest in the insured property. Typically, there are no additional premiums after the policy is issued.
If there is a mortgage, the lender will require a Lender’s policy. This policy protects the lender and is usually paid for by the borrower. The coverage provided to the lender by this Lender's policy is essentially the same as the coverage provided the buyer in the Owner's policy.
What Documents You Receive From the Title Company
You will always receive a Title Commitment, but you will only receive CC&R documents when there is an HOA (Home Owners Association) associated with the property:
The Title Commitment is a short document, but it’s an important one and you should read it. It has two parts:
This portion of the Title Commitment gives the basic facts about how much insurance coverage you are receiving (usually the current cost of the home), and a legal description of the property (…UNIT 5, PART 2, according to the plat of record in the office of the County Recorder of Maricopa County, Arizona, recorded in Book 319…).
Schedule B (Part I)
Part I is the Requirements section. Until all Requirements are satisfied, there will remain a Cloud on the Title. Once all Requirements are fulfilled, the Cloud is removed and the Title Company will give the final Title Commitment. This will give you a list of all items the Title Company typically requires before they will give the final Title Commitment.
Generally, the list of Requirements are things you would expect:
Occasionally you will find something unexpected such as an unresolved easement problem, or an outstanding mechanics lien (an unpaid contractor’s bill), or the seller isn’t the only owner on the Deed. If these situations arise, then you have a Cloud on the Title and it needs to be resolved by fulfilling the Requirements before Final Title Commitment is given.
It is important to review Schedule B to be sure you don't have anything unexpected that will Cloud your Title.
Schedule B (Part II)
Part II is the Exceptions section. These are items the Title Company will not cover in the Title insurance policy they are issuing. You will want to review this section carefully.
Usually the Exceptions include restrictions or agreements that are recorded in county records related to the property. For example, the CC&R, easements, or an upcoming tax that is not yet due. The buyer is agreeing to the restrictions on the property, and therefore if there is a future problem with these items, the Title Company will not cover them.
If there is an HOA, the CC&R documents will be delivered as part of your Title Commitment package. The CC&R may have restrictions to your property’s use that you may not have known about when you made your offer. You may also find some recent filings related to HOA obligations that could result in future assessments.
Any CC&R you notice in these documents that may restrict your use of the property in a way that causes you to reconsider your purchase would be important, and you do not want to miss them. For example, let’s say that you have a recreational vehicle and intend to park it on your property. Maybe you plan on building a garage for it. Any restrictions to the contrary would be important to you.
What if you find restrictions that you cannot live with? Not a problem. In Arizona, the Purchase Contract has a deadline date that allows you time to review these documents, and cancel the contract if they are not acceptable. Don't worry -- we're on top of these deadlines and will help you with each step of the process.