Often overlooked and undermined, insurance plays a crucial role in real estate transactions in the U.S.
It isn’t easy to buy or sell a property without insurance. Every state requires that real estate agents be licensed and bonded, and most states also require that buyers and sellers carry title insurance on properties valued at over $1,000. In addition, many lenders insist on carrying their title insurance before they will finance a sale.
In the U.S., there is no single, compulsory form of insurance for property transactions. Rather, all parties to the transaction are generally responsible for protecting their interests by choosing and purchasing appropriate insurances. The thoroughness with which this is carried out depends upon the budget, the size and value of a property, the number of involved parties in the transaction, and other factors.
In most cases, real estate transactions require buyers to be bonded by their insurance policy. Many sellers also carry their title insurance at the time of closing. In some cases, lenders require buyers to obtain title insurance before approval can be granted.
It is not uncommon for lenders to insist on the borrower covering the lender’s title insurance policy. The lender will then require that the insured party sign a “loss payable” endorsement (in other words, an agreement to indemnify the insured against loss and reimburse any claim or expense it expends).
In addition, there are cases where the seller and buyer could be required to carry other kinds of insurance from the Sunnyside Title Agency. These additional insurances can include:
- Commercial general liability (CGL)
- Flood hazard insurance, if the property is in a flood-prone area or has a history of flooding
- Personal umbrella liability coverage for claims greater than the limits provided by the CGL insurance
- Umbrella excess liability coverage for claims greater than the limits provided by umbrella liability insurance
If these policies are not secured in a real estate deal, the buyer risks losing any money they invest in closing costs and the down payment. They could also find themselves personally liable if someone is injured on the property and brings a lawsuit against them. If the buyer already has CGL or property insurance, it may only need to be “bundled” with other policies.
Typically, the risk is minimal for buyers who do not require financing, and title and escrow companies will readily provide them with whatever coverage they feel comfortable purchasing at that time. However, for buyers who want a lender involved at closing, additional coverages may be required.
Title insurance provides certain guarantees to buyers and lenders that the title presented is clear and free of any encumbrances, including rights of ownership or easements. Title insurance also includes an endorsement to protect the insured from undisclosed or unknown items on a property, so long as the insured party does not intentionally conceal these. Visit Sunnyside Title Agency to learn more.
In addition, most title insurance policies will also cover a failure to convey legal documents and the loss of deeds or other instruments. Title insurance may also provide coverage for costs incurred by the insured party because of errors made in recording legal documents.
The borrower can purchase title insurance only if the lender demands it, which is still the case in most transactions. The borrower pays all premiums for the lender’s title insurance policy, which indemnifies the lender against loss due to any encumbrances not disclosed by the borrower.