The four most popular “Extra Coverage” options in Title Insurance are:
- Rights of parties in possession (this exception would include, for example, the rights of a tenant with an unexpired lease term)
- Encroachments, boundary issues, and other matters that an accurate survey would disclose
- any easements not shown by the public records, and
- Construction and worker’s compensation liens
If you are borrowing any funds to make a Commercial Real Estate (CRE) purchase, your lender will generally require that you purchase each of the four categories of “extra” title insurance coverage. The reasoning being that by removing any of the four exceptions from the Owner’s Title Insurance Policy, the same exceptions are simultaneously removed them from the Mortgagee Title Insurance Policy as well.
This purchase of “extra” insurance protects the bank’s investment in the real property in the unlikely event that you default on the loan. Should a foreclosure on the property take place, the bank would fully own the property. (This is known as “REO” or “real estate owned” in the mortgage world.) Since banks are lenders, and not landlords or realtors, they hate to be put in this scenario in the first place. As such, they generally do all they can at closing to make sure their position is optimal considering the possible REO situation that could arise.
What if I’m not borrowing funds to make my CRE purchase?
If you are not borrowing any funds, then the choice is yours. However, your decision as to whether to purchase the insurance must be made prior to going to closing. Title Insurance is not like car or homeowner’s insurance where you can add or remove additional coverages throughout the life of the policy. The details of the Title Policy are determined the day of closing. So, you do not have the option to purchase the insurance later, not even the very next day after the closing.
When determining if you want to purchase the policies, Its important to consider the following: The extra cost for this insurance is minimal compared to what it would costs to fix a boo-boo in the title work or sue another party over an issue. I would recommend purchasing all four extra coverages to any of my clients who are acquiring commercial real estate. Make any potential errors the Title Company’s problem by simply paying what is relatively a small amount of monies. Really, what your doing is purchasing peace of mind- and that, as they say, is priceless.
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