There are certainly variations in custom from state to state, and even county to county.  In some locations, the seller is required to furnish an owner's policy to the buyer, in others the buyer pays for it if owner's coverage is desired.  I have always wondered about this difference and I thought it would be worth taking a closer look to see which makes more sense.  Add a comment and let us know what the custom is in your area and what you think about it.

The best way to determine local custom is to examine the standard real estate purchase agreements used by the local boards of Realtors.  For this blog, I'll quote from the sales contract commonly used in my home county, Richland county, and the one used 60 miles south of here in Franklin county.

The first thing to consider is the requirement in both contracts that the seller convey to the buyer marketable title.  Both require a Warranty Deed.

Richland county:

Seller shall... convey marketable title by a transferable and recordable General/Fiduciary Warranty Deed to Real Estate in fee simple absolute with release of dower.

Franklin county:

The Seller shall convey to Buyer marketable title in fee simple by transferable and recordable general warranty deed, with release of dower, if any, or fiduciary deed, as appropriate, free and clear of all liens and encumbrances not excepted by this contract...

In this regard, both contracts are remarkably similar.  Just to be clear, let's examine what it means to convey marketable title and what warranties are included in a general warranty deed.

According to the Ohio Revised Code, marketable record title means a title of record, being an unbroken chain of title for forty years or more, which operates to extinguish such interests and claims existing prior to the effective date of the root of title, subject to certain exceptions defined in Ohio's Marketable Title Act (MTA).  The MTA allows for certain interests to be preserved by the filing of a notice and certain other interests are not extinguished by the Act, such as easements for railroad or public utility purposes; easements which are clearly observable; any right, title, or interest in coal; certain mortgages; and any right, title, or interest of the government.

Ohio courts have held that the "title need not be free of any possible claim of defect in order to be marketable, but it must be in a condition as would satisfy a buyer of ordinary prudence."  However, "it should appear reasonably certain that the title will not be called in question in the future, so as to subject the purchaser to the hazard of litigation."

Some believe that because title insurance insures marketable title that the availability of title insurance, without exception to any objectionable matter, is evidence of marketable title.  After all, the title company would not be willing to write such a policy if the title were not marketable.  However, Ohio courts have said that "a purchaser cannot be compelled to accept insurance as a substitute for good and marketable title provided for by contract."

By statute in Ohio, the words “general warranty covenants” have the full force, meaning, and effect of the following words: “The grantor covenants with the grantee, his heirs, assigns, and successors, that he is lawfully seized in fee simple of the granted premises; that they are free from all encumbrances; that he has good right to sell and convey the same, and that he does warrant and will defend the same to the grantee and his heirs, assigns, and successors, forever, against the lawful claims and demands of all persons.”  If it later turns out that there is a defect in the title conveyed, the purchaser can hold the seller liable for breach of the warranties of title.

Now that we know what it means to convey marketable title by general warranty deed, let's examine the role of title insurance and try to determine who it protects and who should pay for it.  But first let's take a look at the purchase agreements for Richland and Franklin counties.

Richland county:

If a title search or title insurance is required, Purchaser shall procure same at Purchaser's expense.

Franklin county:

The Seller shall furnish and pay for an owner's title insurance commitment and policy in the amount of the purchase price.

The theory in Richland county seems to be that title insurance protects the owner and it is up to the purchaser to pay for his policy if he wants the coverage. Of course, title insurance is often viewed as an unnecessary expense, and sometimes as a "rip-off."  Much more often than not, in Richland county buyers do not opt for title insurance.  As a practical matter, buyers buy as much home, or sometimes more, than they can afford.  They need every dime they can muster to complete their purchase.  Thus, owner's policies are rare in Richland county.

I have even heard Realtors say "you don't need title insurance because the bank is getting a policy."  Clearly, not all Realtors understand title insurance, marketable title, or warranties of title.

The view in Franklin county seems to recognize that both buyers and sellers are better off when everyone is covered by title insurance.  Is this the better approach?

An owner's policy of title insurance insures, among other things, that the title is marketable.  It covers the owner for as long as he holds an interest in the real estate or so long as the seller may have liability by reason of warranties in any transfer or conveyance of the title.  And, it not only covers the claim, but also the costs, attorney's fees, and expenses incurred in the defense of any covered claim.

Thus, in Franklin county, if a defect in the title is discovered after conveyance, the buyer has an owner's policy which should protect his interest.  It would most likely be unnecessary to sue the seller under the warranties of title.  By providing a title policy to the buyer, the seller has protected himself from a potential lawsuit.  In the event that the claim is not covered under the buyer's policy, the seller has a policy that will defend him in the event of a claim for breach of the warranties of title.

By contrast, in Richland county the buyer who did not get a policy is left with the sole remedy of suing the seller.  Most likely the seller did not have an owner's policy either, leaving him liable for his own defense costs and any eventual judgment which may be rendered.

Regardless of who pays for the policy, the Richland county contract is seriously flawed.  Seller's agents are doing a disservice to sellers in this county with such a contract.  Why?  Because it requires sellers to convey title by general warranty deed, leaving them liable for potential breach of warranty claims, and by not requiring any title insurance on the transaction.  It is completely up to the purchaser to decide whether or not to purchase a policy, which most often means no policy will be issued. 

As an attorney, I could never advise a seller to sign the Richland county contract.  I recently drafted a sales contract for a seller and I did not use the standard board of Realtors contract as a guide.  Instead, I required the buyer to purchase an owner's policy or, at the very least, an attorney's opinion of title.  If the seller does not want to pay for an owner's policy, I would have to advise my client to convey title by quit-claim deed and offer no warranties of title on the transfer.

I believe that the reason buyers are not required to pay for their own title insurance policy, under either contract, is because it drives up the buyer's costs of closing and makes it more difficult to sell homes.  That is understandable, but forgoing title insurance is not in the best interest of the buyer or the seller.  Thus, the Franklin county custom seems to be much more favorable.

In Franklin county, where the seller must pay for the buyer's policy, it is acceptable to bother buyer and seller because it costs the buyer nothing for the coverage, and the seller was furnished with a policy when he purchased the property so it seems fair that he do the same for his buyer. 

Of course, changing the Richland county contract at this stage would be problematic.  Sellers would most likely object because nobody paid for their policy when they purchased the home.  But, in the long run, making the change would better protect homeowners in the county.

As always, I'm interested in your thoughts.  What is the custom where you are?  What do you think the most beneficial approach is when it comes to protecting the parties, and who should pay for the policy?

Robert A. Franco
SOURCE OF TITLE