What does title insurance cover?

The question is asked, “What does the title insurance policy cover in Texas?” And “What is extended or omitted coverage?” These are great questions but the answers are complex.  Let’s start with the policies themselves to give us a framework for discussing coverage.

The main title policies issued in Texas in regular transactions with a  buyer/seller and/or a borrower/lender are the Owner’s Policy of Title insurance (T-1), the Texas Residential Owner’s Policy of Title Insurance One to Four Family Residences (T-1R) {wow that’s a really long name so the title industry usually just calls it the residential owner policy}, and the Loan Policy of Title Insurance (T-2) which is issued to the lender.

The coverages in the owner’s policies - T-1 & T-1R are essentially the same. The Texas Department of Insurance that promulgates all title insurance forms approved new T-1 and T-2 forms that became effective in early 2008.  In both of these new policies, there is a heading on the first page of the policy form that says, “COVERED RISKS.” These covered risks were not intended to provide more or less coverage than what was provided in the prior forms, but were intentionally drafted to greatly elaborate on specifics of the covered risks including the heading, which previously did not exist.

In the T-1, which is issued to and for the benefit of the owners of a piece of real estate, there are ten listed coverages. The following is an attempt to summarize those ten items in plain language.

Conditions to Indemnification

The insured in the policy will be reimbursed for damages (indemnified) if:

1. title is not vested in the insured owner.
2. there is a defect in title to or lien on the property.
3. someone can take the property away from insured based on a superior right to the title.
4. there is no legal access to get to the property (but this does not cover physical access).
5. there is a notice filed in the Public Records that there is a violation or enforcement of a law, ordinance, permit or governmental regulation that directly affects the property.
6. there is a notice filed in the Public Records that there is an enforcement action based on police powers that affects the land (like there’s a crack house on property to be torn down by the city)
7. there is a notice filed in the Public Records of an action in eminent domain (a povernmental authority is taking away part of the land for a public purpose, like street widening, etc.)
8. some or all of the property was previously taken away by a governmental body and the buyer did not know about it before buying (like a drug enforcement levy).
9. there is a determination in Bankruptcy Court in a suit affecting a prior owner, that takes title away from the insured.
10. something is filed in the Public Records after the Date of the Policy but before recording of the Deed that vests title in the insured.

I told you they were tedious and complex.  And now that you have a general understanding of the stated coverages, remember that there is also a part of the policy called schedule B which is very important because it shows the “Exceptions to Coverage” which limits or in some instances negates the coverages discussed above.  For instance, if there is a lien of record, it should be shown in Schedule B and would effectively amend the coverage #2.  Likewise, if there is no determinable legal access, an exception will be shown in Schedule B that effectively overrides the coverage #4.

Coverage Summarized

Without being nearly as technical as above, let me just summarize the coverage afforded the lender under the T-2 policy as insuring the validity, priority and forecloseability of the lien insured.  The lender really only cares about the validity and enforceability of the lien securing the money that the lender loaned the borrower.  So that’s what the Loan Policy covers.

A thorough discussion of extended or omitted coverages would be even more difficult than the general discussion above, so I will try to give a general overview of the concepts.  Through the use of specific Endorsements or other amendments to the policies, some coverages may be changed.  Actually the title industry in Texas does not use the terms “extended” or “omitted” when referring to policies coverages.  However, there are numerous promulgated procedural rules that authorize additions or limitations to the standard coverage.  One common one is if buyer or seller provides an acceptable survey of the property (generally required by a lender), then the limitation of policy coverage as to those items that might be shown on a survey may be removed, resulting in more coverage for the insured.

Provided courtesy of Bruce Liesman of Independence Title.