BACK TO BASICS – WHAT IS DEFECTIVE TITLE INSURANCE AND WHEN IS IT HANDY?

23 / 09 / 2021

What is defective title insurance?

Defective title insurance protects against a specific title defect which would affect the use and enjoyment of a property. Title defects can affect value and may influence a lender’s willingness to lend against the property or a buyer or tenant’s interest in acquiring the property. A defective title insurance policy can often help a lender, buyer or tenant become comfortable with the existence of the title defect, without the need for the title defect to be resolved.

Title defects range from deal-breaking issues to minor problems which a buyer, tenant or lender could overcome. At the more serious end of the scale, title defects can include not being able to access a property, not being able to use a property for certain uses or not being able to prove that certain essential rights have been granted for the benefit of the property.

The premium for a defective title insurance policy is a one-off payment (rather than an annual payment) and most policies will cover successors in title, tenants and lenders.

What types of specific risk can defective title insurance cover?

  • Breach of Restrictive Covenants: where a property is subject to a restrictive covenant which is currently being or is likely in the future to be breached, title indemnity insurance can be obtained to insure against the risk of the party with the benefit of the restrictive covenant enforcing it;
  • Missing Searches: given the current delays in searches being returned due to COVID-19 (amongst other reasons), missing searches insurance can be obtained to cover any adverse entries being revealed in searches that are not obtained prior to completion. Typically, insurers will prefer to see a historic search and policies will cover any adverse entries not covered by the historic search;
  • Lack of Rights: where rights are required for the use of a property (such as rights of way over a private road or rights to use private conduits) but the title and deeds to the property do not refer to the grant of such right, title indemnity insurance can be obtained to insure against the risk that the owner of the property will be prevented from exercising such rights and be unable to use the property;
  • Missing Documents: where the title to the property refers to a deed or plan which has been lost or the Land Registry no longer hold a copy, defective title insurance can be obtained to cover any risk that the document will be found and contain unknown title defects. Similarly, if documents refer to rights which are unclear or missing key information, defective title insurance can be obtained to insure against the risk that any such rights are exercised over the property.

Can defective title insurance cover unknown defects?

Insurers can provide title defect insurance policies known as ‘all risk insurance’ where there is no specific title defect, but full due diligence has not been carried out or if a buyer would not have the benefit of usual comforts provided by a seller or landlord on completion. Such policies are designed to give an interested party ‘piece of mind’ but do not guarantee that no title defects exist or resolve any that do.

What types of risk will defective title insurance not cover?

Insurers will consider a number of factors on a case-by-case basis when determining the remoteness of the risk of the defect and deciding whether they can offer title indemnity insurance cover. This means that not all title defects can be insured against.

Insurers will consider factors such as:

  • the value of the property;
    • the age of underlying documents;
    • the number of potential claimants;
    • how long the property has been used for its current use;
    • what the long-term/development plans are for the property. 

Although often seen as cost effective ways of dealing with a title defect, depending on the nature of the risk, defective title insurance policies can be expensive – policies for lack of rights of access or ransom strips can cost up to 30% of the value of the property, if they are obtainable at all.

What do you need to consider when deciding to incept defective title insurance?

  • Policies can often contain provisions preventing related information or the existence of the policy being disclosed to third parties without the insurer’s consent – make sure to follow these to avoid inadvertently voiding the policy;
  • Defective title policies often prevent you from trying to resolve the title defect without the insurer’s consent. If you try to resolve the title defect without notifying the insurer, you could be left with an invalid insurance policy and having ‘tipped off’ someone who could enforce the title defect;
  • Some title policies only cover against title defects for a certain period of time. If the title defect is likely to remain an issue after the expiry of such period, a new policy will be needed (and a new premium will need to be paid);
  • Title policies often cover successors in titles, tenants and mortgagees – but make sure that anyone with an interest (or likely to have an interest in the future) in the property is covered by the policy;
  • Insurance policies often cover a specific use, if you are intending to redevelop or change the use of a property, consider this before agreeing your policy – otherwise you may face costly endorsements down the line or risk invalidating the policy;
  • Whilst title indemnity policies are often cheap and quick ways of providing comfort against a title defect, they do not make the title defect go away.

Key Points:

  • Title indemnity insurance is often seen as an efficient and cost-effective way of dealing with a title defect, but it does not resolve the title defect itself;
  • Depending on the nature of the defect, title insurance can end up becoming expensive (and sometimes is not available at all);
  • The premium for title indemnity insurance is a one-off payment due when the policy is incepted; and
  • Consider whether title indemnity insurance is suitable as soon as possible after a title defect is identified to avoid any delay to a transaction timeline.