Title Insurance: What Is It?
Most real estate transactions in Michigan require title insurance, and title insurance will always be required if the buyer is obtaining a mortgage as part of the transaction. Title insurance reimburses a buyer for losses caused by certain defects to the title of the property buyer is interested in purchasing.
Under a Purchase Agreement between the buyer and seller, the seller promises to provide the buyer with “good title,” which is usually accomplished by providing the buyer with a title insurance policy in a form satisfactory to the buyer. The Purchase Agreement is sent to a title company and the title company issues what is called a “title commitment.” The commitment lists the requirements that must be fulfilled before the title company will agree to issue title insurance and also contains a list of exceptions or items the title insurance policy will not cover.
So what are some things a title company requires before they will issue a title insurance policy? Some requirements might be a little more obvious, such as requiring the seller to convey the property to the buyer via a warranty deed. If the buyer or the seller is a business, the title company will likely require evidence that the business is actually a business and in good standing (shown by Articles of Incorporation or Articles of Organization), and that the person purchasing or selling the property on behalf of the business has the authority to do so (shown by Bylaws, Operating Agreement, and resolutions of the governing body). The title company also requires the seller to pay off any taxes owed, outstanding mortgages or utility bills, and liens attached to the property.
Title commitments also contain a list of exceptions. It is important to review not only these exceptions but the documents that support each exception (not all title companies provide you with these documents, but you can always request them). These exceptions include what are referred to as “standard exceptions,” generally liens, easements, encroachments, or other encumbrances that are not part of the public record or recorded with the Register of Deeds. To make sure the buyer is protected against items that could affect buyer’s right to the property but are not yet recorded, many buyers opt to have a title insurance policy that is issued “without standard exceptions,” which would cover items not listed on the public record. The exceptions also exclude certain recorded property restrictions from coverage. For instance, Consumers Energy might have a ten-foot easement across your backyard. This easement might restrict where you can install a vegetable garden or storage shed, and any dispute with Consumers Energy regarding the easement would not be covered by the title insurance policy since the easement was a listed exception. Condominium master deeds/bylaws and subdivision master deed/bylaws and the provisions therein are always excluded from coverage.
The Purchase Agreement specifies how title insurance policies are issued, so if you are purchasing property and want a title insurance policy issued “without standard exceptions,” be sure to require it in the Purchase Agreement. Our attorneys can help you by drafting purchase agreements, reviewing title commitments, and otherwise assisting you with your real estate transaction.