Why Title Insurance is Confusing

Introduction. For many years before Covid, when Portland Metropolitan Association of Realtors® (“PMAR”) had live New Member Orientation (“NMO”) seminars, I spoke about real estate basics; the Sale Agreement, contingencies, financing, professional inspections, etc.

One of the topics of discussion included title insurance. I would routinely ask the new licensees for a show of hands of those who looked over the preliminary title reports (“PTR”) when they came in after an escrow was opened. Only a very few hands were ever raised.

To be clear, it is my opinion that review of the PTR is not a standard of practice or standard of care for Oregon Realtors®. They are not expected to be title experts. In other words, a broker’s failure to review the PTR is not, standing alone, client negligence or a breach of fiduciary duty.

However, if they do review the PTR, agents should never render an opinion to clients about whether title is “clear” – nor should they opine about the legal effect of the Special Exceptions to title appearing the PTRs.

If all this is true, then do Realtors® need to concern themselves with title insurance at all? Can/should they just ignore the issue entirely during their transactions? The answer is an emphatic “No.” Title insurance is included in all broker pre-licensing training for a reason.

It is an integral part of every real estate transaction, although the role title insurance plays in the pre- and post-closing process is not widely understood by sellers, buyers, Realtors® and attorneys.

The real experts are the title officers who examine the title and sign the PTRs. However, they cannot serve as the parties’ experts or attorneys. Rather, the title officer’s role is to review the public record information on the subject property that is provided by their title plant,  evaluate it, and  make sure it is accurately disclosed in the PTR. When appropriate, title officers are available to answer questions about the listed Special Exceptions, as explained below.

In the standard property transaction, the Sale Agreement gives buyers a fixed number of business days to accept or reject the information in the PTR. This contingency is one of several available to buyers after their offer has been accepted. Upon timely objection to title, the buyer is entitled to terminate the transaction and receive a full refund of the earnest money deposit.[1]

The Conundrum. But here’s the rub: If most buyers do not understand the information disclosed in the PTR, and their brokers are equally unclear, what purpose is served? How is the buyer to know whether to opt-out of the transaction (i.e., exercise the title contingency), or remain in the transaction (e.g., waive the title contingency)? Calling the title company to get direction on how to proceed will likely result in the response, “We cannot issue legal advice” – which is correct and appropriate.

The good news is that pursuant to the OREF Sale Agreement, a buyer’s failure to timely object to the information in the PTR during the contingency period does not mean the seller is free to convey unmarketable title to the buyer.[2] However, this does not mean that certain exceptions to title, such as recorded CC&Rs or easements, are meaningless and don’t need to be reviewed during the allotted contingency period. I will explain below.

 Is Title Insurance Truly “Insurance”? To answer this, we first need to define the concept of “insurance.” When we think of fire insurance or auto or health insurance, we think of a policy that provides benefits, usually compensation, in the event of an unexpected occurrence. This loss, such as a fire, collision, or illness, is the “risk” that is insured against. No one, the insurer or insured, actually knows if or when it will occur.

But protection against unknown risks cannot be strictly said of title insurance. The reason is because title insurance is not really based upon the standard concept of “risk” as described in other insurance policies.

In standard insurance, the company bases its evaluation of risk, and ultimately its cost to the consumer, upon actuarial or statistical evaluation. The company, knowing the odds, charges a premium designed to compensate it for taking the risk. But as discussed below, with title insurance, the company is permitted, in the vernacular – to hedge its bets. Some may disagree with this characterization. Regardless of how the issue is framed, typical loss and loss-adjustment expense ratios are 4% to 13% for title insurers, compared with the 65% to 85% in the property/casualty industry.[3]

How Title Companies Hedge Against Risk. When escrow is opened, the title company closely examines the public record to determine if there are any encumbrances (aka “defects,” or “clouds”) against the seller’s title. These encumbrances normally take the form of:

  • Financial matters, such as mortgages (i.e., “trust deeds” in Oregon), judgments, taxes, assessments, or other charges against the property that must be paid to be removed from title; or
  • Nonfinancial matters, such as easements, deed restrictions, or other limitations on the use of the property that typically cannot be removed.

Both matters are identified as “Special Exceptions” in the PTR and are not covered by the company’s policy of title insurance. They are excluded (i.e., “excepted”) from coverage. This means that if the insured buyer closes their purchase and goes into title, these encumbrances do not go away – they impact the title going forward.

Then What Services Do Title Companies Provide? If after finding and identifying the Special Exceptions, the company excludes them from insurance coverage, what risk are they undertaking? For what are they being paid? They just eliminated all the risks!

Title companies provide several important services to buyers. The main one is examining the chain of title and disclosing all of the matters of record affecting of the subject property.

Examination of Title. As noted, they examine the record title and disclose the information to buyers in the PTR. This includes the (a) names of the owners of fee title (hopefully the sellers whose names appear in the Sale Agreement) and all the recorded matters affecting title. This information has value to buyers, since there is no other efficient or cost-effective way for them to find out if their seller’s title is marketable, i.e., it is free and clear of objectionable liens and encumbrances, and therefore capable of being legally conveyed.

Once this information is disclosed, it is up to the buyer to decide how to proceed. If the Special Exception is financial, such as a recorded trust deed or judgment, the buyer would normally demand that the encumbrance be paid off before closing, thus removing it as a charge against the property. If it is non-financial, such as an easement or deed restrictions (“CC&Rs”),[4] the buyer should review them and decide whether they are acceptable.

 So, When Does The Title Company Ever Pay a Claim? Question: If the company reviews record title and then excludes from coverage every risk arising from that record, why would any claims ever be filed?

Answer: Because errors can occur during the examination of title. If the company misses a recorded encumbrance, such as a $25,000 judgment lien, it does not show up as a Special Exception on the buyer’s title policyi.e., it remains on the buyer’s title after closing. Thus, the buyer would have a “claim” against the title company for the error, who must then do what is necessary to remove it from title. Normally, that would mean paying off the judgment creditor and seeing that a Satisfaction of Judgment is recorded. Voila’! The buyer’s title is free of the encumbrance.

If the title company misses a non-financial encumbrance, say recorded CC&Rs, the buyer’s “claim” is more problematic, since the insured would have to establish that because of the company’s oversight, their title suffered a loss in value due to being encumbered by the recorded (but missed) CC&Rs. But most CC&Rs do not negatively impact the marketability of title, so it is hard to say any monetary loss is suffered by the owner. Accordingly, it is these nonfinancial encumbrances of record that need to be reviewed by buyers during the title contingency period. They could cause problems to certain buyers since they will remain on title if not objected to within the contingency period. An example might be a deed restriction against operating a day care facility on site or conducting certain other types of businesses.

Remember, the Sale Agreement is quite clear that the failure to timely object to a Special Exception during the contingency period constitutes a waiver of the right to do so later (subject only to the marketable title exception). Silence is consent.

However, there are some non-financial encumbrances that if erroneously missed in the title examination and therefore not listed in the Special Exceptions (such as a non-probated estate a hundred years ago), could result in a claim against the title company because there are heirs of the estate who might still have an unreleased interest in the property. This type of error would require the title company, at its cost, to locate the living heirs to obtain deeds (e.g., quitclaim deeds) from them, releasing their interest in the new buyer’s property.

ConclusionThe take-away is that if it has done its job correctly, the title company will have accurately reviewed and disclosed all public record encumbrances (financial and non-financial) in the PTR and subsequent title insurance policy as Special Exceptions. Ergo, there are no known persons with any interest in the property being conveyed – it is free and clear of objectionable liens and encumbrances.

But if it has not done its job correctly, it is likely due to the examiner’s failure to “catch” some defect in the record title and disclose it as a Special Exception.

Thus, loosely speaking, title companies are really just warranting their work; figuratively speaking, they tell their insureds that “What we’ve disclosed to you in the PTR and final policy as ‘Special Exceptions’ represent everything on the public record affecting your title.” If they are correct, their insured has been fully informed and there are no claims. If they are wrong, i.e., some recorded encumbrance has not been listed as a Special Exception and it was not caught before closing. In those instances, the company must deal with their insured’s claim under the terms of the policy.

 Two things of note:

  • There are also “Standard Exceptions” in the PTR and final title policy. If a loss arises from an event that falls within one of the Standard Exceptions, there will also be no title insurance coverage.[5] However, in most instances, these exceptions from coverage can be mitigated in advance by specific due diligence precautions taken by buyers. This is a topic for another day.
  • Additionally, there are some isolated circumstances that title companies expressly cover in their policies, such as forgery, impersonation, lack of capacity, failure of a necessary party to join in a deed, and other events which cannot easily be discerned from the record title. These can be characterized as “risks.”

Confusing? Yes. The interesting question is, given the complexity of title coverage, and the fact that most buyers in Oregon do not hire qualified attorneys for assistance, why so few title problems occur?[6] To a degree, this is attributable to good escrow officers, who can proactively spot problems, and good title officers, who are accessible to the parties – and their attorneys – when questions arise.

For a more in-depth discussion of these and other title issues, see Title Insurance 101, here, and Title Insurance 201, here~ Phil


[1] See Section 9 of the OREF 2021 Sale Agreement.

[2] See Lines 154-155 of the OREF 2021 Sale Agreement. “However, Buyer’s failure to timely object shall not      relieve Seller of the duty to convey marketable title to the Property pursuant to Section 28 (Deed), below.”

[3] Rating Title Insurance Companies, AM Best, 2016. See link, here.

[4] It is these easements and use restrictions that buyers need to review within the title review period to make sure they do not contain any unacceptable provisions. They will not go away after closing.

[5] E.g. governmental regulations; title defects known to the insured; matters that a correct survey would disclose; unrecorded liens; parties in possession.

[6] It is important to know that most western states rely upon title insurance companies to examine title, while in the Midwest and east coast, lawyers check title. For this reason, the use of lawyers in residential real estate transactions is not commonplace where title insurance companies do the title examination such as Oregon and Washington.