Q: We have two pending transactions: one where we represent the Seller and one where we represent the Buyers. In both of these transactions, the Buyers have stated that they do not want title insurance. Please advise us as to how we should handle these situations. I always thought it was mandatory that the Buyers obtain title insurance. Should the Seller demand that the Buyers get title insurance?
A: Buyers obtaining title insurance has been such a routine aspect of closing real estate transactions that many people in the real estate industry believe that Buyers are obligated to buy an Owner’s Title Insurance Policy. However, under federal law, the standard mortgage documents that Buyers receive must specify that Buyers are not obligated to obtain title insurance.
The title insurance that is available for Buyers does not protect Sellers; if Sellers conceal information or make any misrepresentations to the Buyer about issues that are covered by title insurance, the Seller will still be liable for the Seller’s actions and/or inactions. The Seller does not get to benefit from the Buyer’s insurance coverage, and, in most instances, the Title Company will also seek reimbursement from the Seller for any sums paid by the Title Company to the Buyer. Thus, there is no reason for the Seller to demand that the Buyer obtain that coverage.
Regardless of who the Agents represent, real estate professionals should document that the Buyer has been advised that, notwithstanding the federal mortgage disclosures, California law strongly recommends that Buyers obtain title insurance. California Civil Section 1057.6 includes a mandatory notice provision that is to be included in the Buyer’s closing documents which states:
“IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING.”
There are two standardized methods for Agents to document that Buyers have received the right advice.
The first is to have the Buyers sign an Advisory Regarding Purchasing Title Insurance that explains what may occur if the Buyers choose not to purchase an Owners’ Title Insurance Policy and that the Buyers are assuming the risks of deciding to forego that protection. This is an easy document for Buyers’ Agent’s to use but Listing Agents can also choose to send it to the Buyers’ Agent for signature by the Buyers. This form is the first attachment to this Weekly Practice Tip.
Another effective tool is to have the Buyers sign a Title Insurance Waiver Addendum to the Purchase Agreement which evidences that the Buyers have received the proper advice and warnings and are choosing to proceed with the transaction against the advice of the Brokers; this document specifies that the Buyers agree to hold the Brokers and the Seller completely harmless for the Buyers’ decision to forego title insurance.
PRACTICE TIPS:
- Listing Agents: If you learn the Buyer does not intend to obtain title insurance:
(a) do not upset the Seller if the Buyer chooses not to obtain title insurance;
(b) do not recommend that the Seller pay for the Buyer’s title insurance;
(c) point out that the Buyer has that option to not obtain title insurance under federal law; and
(d) document that you have delivered either the Advisory Regarding Purchasing Title Insurance or the Title Insurance Waiver Addendum to the Buyer’s Agent – it is not necessary to use both forms.
Even if the Buyer chooses not to sign either document, delivering either of these forms to the Buyer’s Agent will serve to prove that the Listing Agent has done what is reasonably possible to make sure that Buyer has received the right information and advice.
- Buyer’s Agents: If you learn that your client does not intend to obtain title insurance:
(a) make sure that the Buyer has received and understands the California statutory notice;
(b) document that the Buyer is proceeding against the advice of the Buyer’s Agent in closing escrow without obtaining title insurance; and
(c) provide the Buyer with the Advisory Regarding Purchasing Title Insurance.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2021 07/30/2021
Two Attachments follow:
Attachment No. 1:
BUYER ADVISORY REGARDING PURCHASING TITLE INSURANCE
Although federal law specifies in the mandatory mortgage documents that Buyers are not obligated to obtain title insurance, California law strongly recommends it. California Civil Section 1057.6 includes a mandatory notice provision that states:
“IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING.”
If you choose to purchase an Owner’s Title Insurance policy you will receive a Preliminary Report (“Prelim”) from a Title Company as a part of your investigation regarding the status of the Property. A Prelim is only an indication of how the Title Company will insure title; it may not contain every item affecting title. Nonetheless, Real Estate Brokers and Agents strongly encourage Buyers to review all matters affecting title and purchase Title Insurance at the Close of Escrow to ensure that you hold title.
While you have an option as to whether you will purchase Title Insurance, you should consider all of the following factors when making that decision.
- Most Title Companies will require that you and the Seller sign an Addendum to the Purchase Agreement at the beginning of the transaction to delete any requirement that the Title Company provide an Owner’s Title Policy. The Seller may not agree to make that change.
- Because a Prelim is merely an indication of how the Title Company will insure title, the Title Company may not agree to provide the Buyer with a Prelim. Alternatively, the Title Company may separately charge a fee to the Buyer for a copy of the Prelim. Generally, if a Buyer purchases an Owner’s Title Insurance Policy, the Buyer receives the Prelim at no cost.
- The cost of the Lender’s Title Policy, required by Lenders and typically paid by Buyers, may increase dramatically if the Buyer is not acquiring title insurance; and if the Title Company is providing escrow services, the cost of escrow may also increase dramatically.
You are strongly encouraged by your real estate Broker to contact the Title Company that you will be using in your transaction to discuss the benefits of purchasing a Title Insurance policy as well as the impact on your title and escrow fees if you decline to purchase an Owner’s Title Insurance Policy.
If you choose to proceed with the transaction without obtaining an Owner’s Title Insurance Policy, you are proceeding against the advice of your Broker and you are assuming all of the risks as a result of your decision.
Buyer understands and acknowledges receipt of this Advisory.
Buyer: _______________________________________ Date: ___________________
Buyer: _______________________________________ Date: ___________________
Attachment No. 2:
TITLE INSURANCE WAIVER ADDENDUM
Although federal law specifies in the mortgage documents that Buyers are not obligated to obtain title insurance, California law strongly recommends it. California Civil Section 1057.6 includes a mandatory notice provision that states:
“IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING.”
In view of this statutory recommendation, most real estate Brokers strongly recommend that Buyers obtain title insurance. Notwithstanding the propriety of obtaining title insurance, Seller and Seller’s Agent have been advised that Buyer has chosen to disregard this standard advice and is opting not to obtain title insurance.
In consideration of Buyer proceeding with the acquisition of the Property against the advice of the Brokers, Buyer agrees to hold Seller, the Brokers and their Agents harmless from any and all claims, liabilities, damages, fees and/or costs that any of the Parties and/or their agents may incur as a result of Buyer waiving the standard provision in the Purchase Agreement that Buyer shall obtain and pay for title insurance.
Date: ___________ Seller:___________________________________________________
Date: ____________ Seller:___________________________________________________
Date: ____________ Buyer:___________________________________________________
Date: ____________ Buyer:____________________________________________________