Did you know that the American Land Title Association (ALTA) Homeowner’s (HO) Policy of Title Insurance offers the highest level of protection for homeowners – even exceeding the coverage of ALTA’s Standard or Extended Owner’s policies?
The standard Owner’s Policy covers documents placed of record before the insured took title, and includes outstanding interests, defective documentation, forgery, fraud, the incapacity of the sellers, unmarketability of title and a lack of legal access to the insured property. This is all important coverage, but ALTA created the HO policy to give consumers even more peace of mind with this additional coverage:
The HO Policy is available for a small, one-time premium payment, the amount of which varies by state, but is typically a 10- to 20-percent increase over the standard policy payment. Like all title policies, this coverage protects homeowners and their heirs for as long as they own the property.
The HO Policy is available in most states, but is not frequently issued. (NOTE: It is not available for issuance in Florida or Texas, and New York offers its own equivalent policy.) It is also not available for all types of transactions. Because the HO Policy covers exactly what its name suggests – the homeowner – its coverage is limited to improved one- to four-family residences where the insured is either a natural person, or the trustee of a personal trust. Partnerships, limited liability companies, corporations, and other entities cannot purchase the HO Policy. Transactions involving raw land or large unsubdivided tracts of land also cannot be insured using the HO Policy.
Here’s a closer look at some of the biggest advantages to issuing an HO Policy, and how it offers benefits not just for homeowners, but also for title agents and insurers, and other real estate professionals aiding the homebuyer.
Perhaps the greatest homeowner value provided by the HO Policy is protection against post-policy ownership claims arising from forgery or fraud. For value comparison, consider the frequently advertised title monitoring services offering to “lock the title to your home.” For a recurring monthly fee, these companies promise to notify you about a fraudulent transfer or mortgage/lien placed against your property, but they supply no insurance to resolve the problem. The HO Policy provides a defense and covers costs associated with the fraud, and is it backed by an insurance company which is required by states to maintain reserves to pay claims.
The building permit violation coverage afforded to the insured under an HO policy may be helpful if a homebuyer must remove an existing structure built by an earlier owner because that owner did not comply with applicable building permit regulations. Imagine a deck built without a permit into a county easement, or an extra bedroom built out in the basement by the prior homeowners – all without benefit of the required building permit and associated inspections and approvals. The new home purchaser will have a rude awakening when they go to the county for permits to remodel other parts of the home. The county may require those unpermitted improvements be taken out – or even completely redone – to comply with local building codes. If the homeowner purchased the home without the additional protections available under an HO policy, they would sustain substantial expense and frustration with their title agent.
Other valuable coverages under the HO Policy that many homeowners will likely require during the span of their ownership are those for mechanic’s liens, actual pedestrian and vehicular access to the property, supplement taxes for construction, and inflation (affording automatic increases up to 150 percent to cover increases in the value of the home).
In issuing an HO Policy, title agents demonstrate the value of working with an experienced title agent, and you can rest easy in the knowledge that you have provided the highest caliber of support and coverage available to your customers. Although it may take a few extra minutes to explain the additional coverages offered by the HO Policy, should you receive notice of a claim that is covered by the additional protections offered by the HO Policy, your agency will benefit from a long list of satisfied customers and referral partners.
In addition, you may find that the extra premium paid for the HO Policy is worth the additional policy-issuing requirements, especially as you seek additional revenue streams in a declining market. Avoiding claims that would not have been covered under other policies also reduces your financial burden. The cost to defend these types of claims – as well as the burden of potential claims against your errors and omissions insurance – far outweigh the cost to your customer for the HO Policy’s increased protections.
But wait, what about your title insurance partner? Won’t these additional coverages result in a higher claims ratio arising from the additional risks? Interestingly, in creating the HO Policy, ALTA contemplated that the additional coverage may result in higher claims, but was willing to accept that risk as long as the increase was not catastrophic. In the past five years, title insurance underwriters have paid over $1 million in claims to homeowners protected by the HO policy – which actually proves its value. Finally, the added reserves generated by the additional premium – coupled with insurers’ strong financial position and legal obligation to maintain adequate reserves to pay claims – ensure that consumers are better protected and resting safely in their “American Dream.” For these reasons, the HO Policy is truly a win for all parties involved.
“The most important part of this rapid response plan is the word rapid,” Schreiber said. “You have a limited window to recover the funds. Fraudsters are not going to leave the funds in the bank where you wired them to, which makes recovery all the more difficult. In most instances, the money is unrecoverable within a matter of hours, or at most, two or three days.”
Marilyn C. Cunningham is Vice President, Mid-Atlantic Regional Underwriting Counsel for Doma Title Insurance, Inc.