This month’s edition of Tales from the Dirt looks at the difference in getting insurable versus marketable title for your client.  As always, this is an event that actually occurred, but the names of the parties have been changed.

When Steve was selling his home, the buyer’s attorney discovered a previous deed of trust that had not been canceled from the public records.  Steve took this information to the attorney who had closed his purchase earlier that year.  His attorney pulled his file and saw the problem.  The previous seller’s attorney had provided Steve’s attorney with a copy of the check that had been written to the mortgagee as well as a copy of the HUD statement showing the mortgage as an item that was to be paid at closing.  Based upon this information, Steve’s attorney had been able to get the title company to “insure over” this open deed of trust.

Steve was told he had title insurance over this deed of trust and that was all he needed.  He should let the buyer’s attorney know this and suggest he “tack on” to Steve’s policy.  Steve conveyed this information to his realtor, who in turn let the buyer and his attorney know that the deed of trust had been insured over in Steve’s title policy and that they were welcome to tack on to his policy.  The buyer’s attorney refused to accept this offer citing the sales contract provided that the seller was to deliver to his client marketable title and just not insurable title.  Insurable title is what is given whenever there is a defect that has not been cured, but has been insured over in a title policy.  

Since the buyer would not close until this mortgage had been canceled Steve instructed his attorney to do what was necessary to get this mortgage properly satisfied.  After looking into the matter, the attorney discovered that the uncanceled deed of trust had originally been given in favor of Bank A, who had just sold the note and deed of trust to Bank B.  No instrument of assignment had been recorded, so the attorney closing the sale had gotten a payoff on the deed of trust from Bank A and sent his trust check to them, where it was subsequently cashed.  As it turned out Bank A was not a bank, but a mortgage broker operating under a name that led one to believe it was a bank.  When the mortgage broker was contacted and asked to return the funds, his response was “if you want your money back come up here to Ohio and sue me”. 

At that point, Steve’s attorney filed a claim on his title policy to have his title cleared so he would  be able to deliver marketable title to the buyer.  Unfortunately, he learned that since there was no foreclosure proceeding filed against Steve, there was nothing the title company could do.  Title policies only cover the insured against out-of-pocket losses for covered items in the policy, or they offer a defense when sued, provided the subject of the suit is a matter covered under the policy.  Title policies do not make title problems go away nor are they covenants for good title.  Although the policy insured over the uncanceled deed of trust, that deed of trust had not caused Steve to suffer any monetary loss at that point.

Uncanceled deeds of trust are a big area of claims, both in the marketability of title realm as well as under the Insured Closing Protection Letter Service title companies provide lenders, so it is important to make certain that open deeds of trust are actually canceled of record and just not “insured over”.