Protections and limitations of title insurance — what you need to know

Most people have title insurance on their property but some may be unfamiliar with the concept, protections or limitations of title insurance. Title insurance is a form of insurance that protects a property owner from financial loss caused by defects in title to a property.

When property is purchased or financed, and sometimes even when property is leased or other property rights are acquired, it’s advisable to obtain title insurance to protect the rights associated with the property.

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A request for title insurance will begin with the issuance of a title commitment from a title company. The title commitment is essentially a promise to the future policy holder that the title company will issue an insurance policy for the property after the terms and conditions set forth in the commitment are met.

The commitment will contain the title company’s requirements for policy issuance, detail any liens or encumbrances that affect the property and specify any exceptions or exclusions from the policy coverage.

After receiving the title commitment, the property owner should carefully review the commitment to identify any issues related to the property. While there are slight differences in a title commitment for residential properties in comparison to commercial properties, the process of reviewing title is similar for both types of transactions.

List of exceptions is critical

One of the most critical areas of the title commitment is the list of exceptions that the title company will exclude from the policy coverage. Exceptions to the title insurance coverage come in two forms: standard exceptions, which apply to all properties, and specific exceptions, which apply to the particular property under review. T

he specific exceptions from coverage are identified by the title company after it conducts a search of the public records related to the property. Any documents recorded against the property will be listed as specific exceptions in the title commitment, such as deeds, mortgages, easements and other agreements between prior owners of the property.

It’s crucial to understand each document listed as an exception, as certain restrictions or limitations can be imposed on the property and can ultimately affect one’s ownership rights related to the property.

Categories of exception documents to be aware of

Below is a summary of a few categories of exception documents to be specifically aware of when reviewing title:

Use restrictions

Deeds, leases and other agreements may impose restrictions on the use of a property. Use restrictions can include limitations on how the property is used, prohibitions on particular uses, and can require that consents by certain parties be obtained in order to use the property in specific ways.

While reviewing title documents, it’s important to consider the intended use of the property, broader categories that generally cover the uses of the property, and any future plans for the use of the property in order to ensure that no exceptions limit or prohibit such uses.

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For instance, if the property is intended to be used as a bowling alley that also serves food and alcohol, there may be title exceptions that expressly prohibit bowling alleys, bowling lanes, bowling establishments, or bowling houses. There may also be broad prohibitions on entertainment, amusement, or recreational facilities, restaurants, bars, or establishments that serve food or alcohol.

Similarly, in residential transactions, it would be prudent to confirm that there are no express limitations or prohibitions on residential uses or requirements that the property be used only for commercial purposes. Thus, use restrictions should be closely scrutinized because such restrictions can prevent the owner’s intended use of the property.

Building restrictions

Certain agreements may restrict the size, location and architecture of a building. Building restrictions can impose specific limitations on the height, square footage, exterior appearance of a building or can require that buildings be located at a certain distance from existing improvements.

For example, if the owner of a two-story office building located in a historic area of a city desires to build additional stories of condominium units on top of the building, the owner should be aware of any title exceptions that prevent construction over two stories, square footage increases, or alterations of the historic nature of the building’s exterior.

In a residential transaction involving the intended construction or renovation of a home, a potential homeowner should look for any title exceptions requiring that the home be located at a certain distance from nearby public roads or other homes. Accordingly, those intending to develop or re-develop a property should meticulously review the title exceptions for any building restrictions impacting the property.

Easement rights

A title company will not typically insure easements, so it is essential to understand who has rights on the property and what those rights are. An easement is a nonpossessory right on another’s land.

Easements exist in many different contexts: shopping centers may be subject to easement rights for access and parking, utility companies may possess utility easements to access a residential or commercial property and build and maintain the required equipment to supply the property with utilities, or a landlocked homeowner may have an easement over a neighbor’s property to access their property.

For instance, if a sewer pipe bursts underneath a warehouse building, a utility company may have the right to access the property and inspect, repair or replace the sewer line, which would be a significant disturbance to the operation of the warehouse. Likewise, a homeowner may be precluded from constructing a large garage in the back of their property due to a utility easement affecting that portion of the property. Therefore, it behooves those reviewing title to identify all easements and determine the effect, if any, on the property as many properties are subject to easements.

Once the exceptions in a title commitment are reviewed and a property owner is comfortable with the effects of the exceptions, the property owner is ready for its title policy. After fulfilling the title company’s requirements and paying a one-time premium, the owner will receive its title policy.

Once in hand, the owner will have some protection from third party claims of title or ownership related to the property. Of course, claims made pursuant to property rights set forth as exceptions will not be covered by the policy.

All in all, property owners should take advantage of the title review process by diligently reviewing all of the title exceptions to understand their property rights and any restrictions affecting the property.

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Megan E. Moyer is an associate in Saul Ewing Arnstein & Lehr’s real estate, environmental and energy department focusing on all aspects of transactional real estate law. She can be reached at Megan.Moyer@saul.com. 

Ian M. Livaich is an associate in the firm’s real estate, environmental and energy department focusing on all aspects of transactional real estate law. He can be reached at Ian.Livaich@saul.com.