Cash and Carry Your Title Insurance!

So you go to the closing.  Everything appears routine.  Mr. and Mrs. Jones, your sellers, show up a bit late but the closing is quick and efficient.  You’ve paid $210,000 for the house.  With a $42,000 down payment and a $168,000 loan you are comfortable you will make a profit.  That’s because the house has an after repaired value of $300,000 and needs only $30,000 in work.  Two months later you’ve spent the repair money and have the house on the market listed for $309,900.  The house has been shown several times and you get a near full price offer.  That’s when the problems start?  Really? 

You get served with a quiet title action filed by Mrs. Jones.  You don’t even remember that Mrs. Jones was one of the people that sold you the fixer upper.  It takes you some time to put it together as to which investment property you are being sued about.  Moreover, why is Mrs. Jones suing you? 

It turns out that Mrs. Jones claims she was not at the closing.  In fact she doesn’t just claim it, it’s true, the copy of the photo identification in the closing attorney’s file for Mrs. Jones does not even resemble the real Mrs. Jones.  It turns out that Mr. Jones and his girlfriend sat across the table from you at the closing.  Mr. and Mrs. Jones are in the middle of divorce proceedings.  The girlfriend presented phony identification to the closing attorney, and Mr. Jones and his girlfriend walked out with a large seller proceeds check. 

As you investigate the facts you are starting to become a little worried but then you remember that you got title insurance when you purchased the home.  In fact as an educated investor you always get owner’s title insurance when you purchase property.  You look in your file and find no policy but the Settlement Statement shows clearly that you paid separate amounts for lender’s title insurance and owner’s title insurance so you feel sure you have coverage.  In addition the real Mrs. Jones is suing you alleging your title is bad, based on a forged deed, this must be exactly what title insurance is intended to cover.  You tender your claim.  It is denied, but why? 

It turns out there is case law in Georgia supporting the position of the title insurance carrier on facts almost identical to those set forth in the hypothetical above.  See Glass v. Stewart Title Guaranty Company, 181 Ga. App. 804 (1987).  This case held that if a title insurance company issues a binder for title coverage and the binder specifies certain conditions precedent and those conditions are not met then the insurer has no obligation to issue the policy.  In the Glass case the binder contained a common condition precedent, namely that the sellers, who were named in the binder, execute a warranty deed.  Of course, only one of the two sellers executed the warranty deed.  The other signature having been a forgery, the condition precedent was not met and the Georgia Court of Appeals ruled that the title insurer had no obligation to issue the policy.  In fact the Court pronounced that “the risk of a forged deed falls on the purchaser.” 

The ruling in Glass is going to seem pretty draconian to many readers.  The title insurer would appear to be in the better position to evaluate, avoid, and spread the risk of a forgery.  The owner has a problem with his title and the title insurer walks.  If you think this sounds like bad public policy, you are not alone, but it’s the law. 

In terms of our hypothetical, you, the investor purchaser, have $72,000 in cash in your investment, you owe $168,000, and your lawyer is telling you that based on Glass, you will likely lose, you are out the down payment and the cash spent to repair the property, and your banker funded your $168,000 note, he is sympathetic but he still wants to be paid.  So how do you, the investor, even attempt to protect yourself from this horrifying set of circumstances.  The answer requires a little background on title insurance and its issuance. 

There are two different types of title insurance policies.  One is so-called long form and the other is so-called short form.  The typical pattern with the issuance of long-form title insurance is that a title binder is issued, the closing occurs, the warranty deed is recorded and returned back from the courthouse, and then the title insurance policy is issued.  Recall in the hypothetical that you had paid for owner’s title insurance coverage but did not have a policy two months later.  This is not uncommon because it can sometimes take months for the warranty deed to come back from recording.  This in turn slows down the issuance of the title insurance policy. 

With short form title insurance the process is simplified and expedited.  A binder is not typically issued to the buyer.  So there are no conditions precedent.  The policy is issued on the day of closing.  You walk out with the policy in your closing file. 

The best practice to begin to avoid the risk of loss associated with your seller’s forgery is to insist on the issuance of a short form owner’s title policy at the closing table, starting with a special stipulation in your purchase and sale agreement requiring a short form policy issued at closing.  You will need to carefully review the conditions and exceptions to coverage in the policy but it is always better to have the policy in hand than to be waiting months for it to be issued.  In fact it just makes plain good sense to get something you pay for.  If you buy a shirt at the store you walk out with it.  Partly because you want to wear it soon, and partly because, if you let the store retain it, the shirt might get lost, damaged, or sold to someone else.  The same with an automobile.  When you buy it you want to drive it off the lot.  If you let the dealership retain it to detail it or for some other reason, the car might get damaged or stolen.  It just makes sense to cash and carry whenever you can.  In other words, you are paying for your title insurance policy at the closing why not walk out with it.  Not only will you have the policy you paid for available for immediate review in the event of a claim but you may avoid a defense to policy issuance based on a condition precedent. 

The Glass case has been around for 18 years.  There is nothing new about the law for which it stands.  What is new is the amount of real estate fraud and the creativity of the fraudsters.  The typical investor is more exposed to real estate fraud due to the sheer number of transactions and because many of us purchase not just from Mr. & Mrs. Homeowner but also from other investors who may be engaging in or have been the victims of fraud.  The Glass case is solid precedent.  While not an inoculation, getting a short form title policy and putting a special stipulation in your purchase and sale agreement requiring a short form policy to be issued at closing are good defenses in your efforts as an investor to avoid a disaster. 

About the Author

David J. Reed, Esq. is a real estate litigator, a licensed real estate broker, an active real estate investor, and a pilot.  For inquiries see www.davidjreed.com. 

Send mail to davidjreed@davidjreed.com with questions or comments about this web site.
Last modified: December 05, 2006