From: cthorne@magnus.acs.ohio-state.edu (Charles E Thorne)
Subject: Re: Title Insurance
Keywords: Fabulous Furry Freak Brothers
Organization: The Ohio State University
Date: Thu, 12 Nov 1992 17:18:11 GMT

In article <19349@smoke.brl.mil> matt@smoke.brl.mil (Matthew Rosenblatt) writes:
>What risks does title insurance cover?

>Hypothetical #1:  Duncan buys Blackacre and lives there.  MacBeth
>murders Duncan and lives, undetected, at Blackacre.  MacBeth does
>not record what he has done in the land records.  Later, MacBeth 
>impersonates Duncan and sells Blackacre to MacDuff, a bona fide
>purchaser for value and without notice that MacBeth is not the
>rightful owner.  At the time of the purchase, MacDuff buys title
>insurance from Chicago Title Company, whose title search has failed
>to turn up MacBeth's theft of the property.  Two years later, Duncan's
>sons Malcolm and Donalbain find out about the murder and return
>to claim Blackacre.  MacBeth, as a thief, had no valid title to
>convey even to a bona fide purchaser, so MacDuff has to give 
>Blackacre to Malcolm and Donalbain.  Question:  Does Chicago
>Title have to pay MacDuff the amount of his policy?

>Hypothetical #2:  The Fabulous Furry Freak Brothers buy Blackacre
>with proceeds from their illegal drug business.  They use the
>property as a base for this business.  They earn so much that
>they decide to move to a bigger house in a better neighborhood,
>so they sell Blackacre to Ruth Schwartz, who has no idea what
>business the Freak Brothers have been engaged in.  Mrs. Schwartz
>buys title insurance from Chicago Title Company, whose title
>searchers somehow fail to discover the Freak Brothers' business.
>Two years later, the Freak Brothers are busted, and the Feds find 
>out about their previous operations and seize Blackacre under the
>forfeiture provisions of the anti-drug laws.  Actually, Blackacre 
>was forfeit to the Government as soon as the Fabulous Furry Freak 
>Brothers bought it with drug proceeds, and if not then, it was 
>surely forfeit as soon as they began dealing in drugs there.  
>So they had no title to convey, even to a bona fide purchaser
>like Mrs. Schwartz.  But Chicago Title did not discover this.
>Question:  Does Chicago Title have to pay Ruth Schwartz the 
>amount of her policy?

>Is title insurance a gamble by the insurance company, based on
>the assumption that their title searchers will be able, most 
>of the time, to find any defects in the purchaser's title that
>might subject the company to liability under its policy?  What
>happens in a case where the defect is something, like the
>"relation back" of a forfeiture, that the title searchers
>could not possibly have found in their search?  If title 
>companies are liable in cases like this, and the number 
>of seizures from bona fide purchasers becomes significant, 
>are the companies going to have to cover their increased 
>losses by raising the premiums they charge their customers?

Both hypothetical situations are subject to a legal interpretation.  Did
the Title Company in fact insure against the event that happened?  If it
did, it would be liable.

Just because the title company could not have known about the event, does
not necessarily excuse them from paying for it.  As an insurance company,
they're spreading the risk to a large number of people.

I would surmise that most title company payoffs are in fact with respect to
events that would not normally be known at closing.  Mechanics liens are a
case in point, since they can be filed after a mortgage and still be a 
"first and best" lien.

Other items that are possible, although probably not as frequent are cases
where heirs come forward because a title restriction was ignored in a future
title and the title reverted to the heirs of the original owner.  These items
usually require more in the way of legal fees (which the title company pays).

Charlie

Newsgroups: misc.legal