A title insurance claim arises when someone asserts an interest or a lien on your property, and that interest or lien is not listed as an exception in your title policy. For example, when you bought your property, you purchased a title insurance policy which listed any exceptions that affect the title such as easements and restrictions, as well as the mortgage you executed to purchase the property. But what if there was a prior mortgage on your property which the title search missed, so it was not released when you purchased your property, and it was not shown as an exception to your title? And now that lender is contacting you to pay the mortgage or suffer foreclosure – what do you do?
The first thing you do is to pull out your title policy and read it. First, check the Schedule B exceptions to make sure that the prior mortgage is NOT listed as an exception to title. If there is no mention of it, then you need to look at the Conditions of the policy, specifically Paragraph 3, which requires an Insured to promptly notify the title insurance company which issued your title policy. This needs to be done in writing, and you should also copy your local title agent if one was involved and the attorney who represented you at the closing if that is the local practice. Paragraph 3 of the Conditions requires the Insured to give notice not only of litigation, but of any matter which the Insured becomes aware of that is adverse to the title as insured, and that might cause a loss under the policy.
It is very important to contact the title company as soon as you become aware of a title issue, because if you ignore the issue, hoping it will go away, it generally will just get worse. It is always more expensive once a lawsuit has been filed. And Paragraph 3 makes it clear that if the title company is prejudiced by the failure of the Insured Claimant to provide prompt notice of any adverse title issue, the title company’s liability under the policy will be reduced by the extent of that prejudice.
So, let’s take the example in the first paragraph. You have purchased your dream home, and have moved in and are making your mortgage payments under your purchase money mortgage. One day, you get a notice from a strange mortgage company saying that they have a lien on your house which is in default and they demand that you pay it. Even if the mortgage is from someone you have never heard of, if it was a valid lien, it remains on the property until the loan is paid off and the lien of the mortgage released of record. So you can take one of two actions: you can ignore the notice, saying that it wasn’t your mortgage, and hope that they will go away; or you can contact the title company. If you ignore the notice, you will probably get more notices, even notice of a possible foreclosure of the property, and you might lose your home. But if you notify the title company immediately upon receiving that first notice, the title company will investigate the matter, and if, in fact, that prior mortgage is a valid lien against your home, they title company will negotiate with that lender and obtain a release. By notifying the title company immediately, you get the title company to defend your title as insured under your policy, and the title company will assume your defense costs and attorneys’ fees. As the Insured Claimant, you have the obligation to cooperate with the title company’s defense, and to provide proof of your loss if required.
The situation where there is a missed mortgage is a simple one. There are other cases where a title claim can arise, such as where there may be a missed easement which affects your use of your property, or there could be a lack of access to your property, or someone in your title forged a signature, and the deed was void. Any of these situations require immediate notice to the title company, and may involve litigation to render your title as it was insured. The title company has the right to cure the title defect, to litigate the claim, to settle it at any time, or to even pay you the Amount of Insurance of your title policy and terminate any further responsibility under the policy.
In many cases, if you have a potential claim, it will be in your best interests to retain your own counsel. There may be situations where the interests of the title company may not be the same as yours, and you need to be aware of your rights.
The last paragraph of the Conditions in every title policy has the address where notices of claim must be sent, and you should send your notice by certified mail, return receipt requested, in order to document the fact that you provided prompt notice. Your local title agent can also help walk you through the process and may even assist you in notifying the title insurance company. It is important to remember that your title insurance policy is a contract, and you have certain obligations under it which must be followed if you want to retain your full coverage.
Here is my usual caveat: The opinions stated in this blog are those of the writer, and should not be construed to be a statement of fact or conclusion of law. Any statements herein should not be relied upon in any litigation, arbitration or mediation. Statements herein have not been approved by the American Land Title Association, its officers or members.