Do I Really Need All These Title Policies?

June 21, 2004, Revised November 29, 2006, Reviewed December 18, 2007

Because title insurance protects against title defects prior to the date of the policy, lenders will insist on a new policy covering them, even if the period since the previous policy is very short. Borrowers should receive a significant discount on such policies, however.

"My husband and I bought a piece of property in November 2001 and had to have title insurance. We began building in December, 2003 and we had to purchase a new policy in connection with our construction loan. Now, we are near completion and getting ready to convert the construction loan to a permanent loan and again we are being told we need title insurance. That will make 3 policies with premiums totaling about $9,000 in less than 3 years. Is this really necessary?"

The way the system works, three policies are necessary, but you should be getting substantial discounts because of the short time periods involved.

A lender policy cannot be transferred from one lender to another. Hence, when you pay off one mortgage when refinancing with another, the new lender wants a policy covering him. Even if the new lender is the same as the old one, that lender is going to want protection for the period since the previous policy.

Title insurance insures against events that might prejudice your title to the property that occurred before the date of the policy. This is just the opposite of other types of insurance, which insure against events that occur during some specified period beginning after the date of the policy.

This means that the lender who makes your permanent loan, even if he also made the construction loan, is not covered for anything that might have happened to your property after December 2003, the date of the last title policy. Because the period involved was so short, the risk might be negligible, but one cannot be completely sure about that.

If the risk was negligible and if the lender had to pay the premium, he might elect to forgo the title insurance, but since you are the one who must pay, why not? This is a good reason why lenders ought to be required to pay the premiums for lender title policies. Not only would redundant policies be avoided but premiums would fall. See What's Wrong With the Title Insurance Industry?

A title insurance insider to whom I showed your letter pointed out to me that if the lender making your loan had to sell it in the secondary market, the requirements of secondary market investors would dictate the required title coverage. That is true, but if lenders were required to pay for title insurance, the secondary market would develop a very low-cost way of covering very small risks.

Meanwhile, the best you can do is negotiate the largest discount possible. Remember that it won’t necessarily be offered to you if you don’t ask.