Real limits of title insurance

July 12, 1994

The recent bank foreclosure on their Eagle Ranch farm may have ended the subdivision development dreams of Frank and Sharon Duncan in Harford County, but it provides a cautionary tale of misunderstandings about the the coverage of title insurance in real estate transactions.

The couple borrowed on their farm to develop another rural parcel near Darlington, but their sale of lots was blocked by the claims of a son of a previous owner. That stopped the cash flow they counted on to finance the mortgage payments and accruing interest on the loans.

When their title insurance company did not pay for their mounting losses, the Duncans filed suit against the firm. The Duncans asserted that they believed their policy would cover any damages resulting from the loss of use of their property, as well as a clear title to that property.

Not so, responded Stewart Title Guaranty Co., arguing that its policy only covers the cost of a lawyer to defend the title in court and a guarantee of clear title, not any resulting financial damages beyond the value of the property.

Although the Duncans have won several court decisions over the years to clear the title, legal appeals now before the state's highest court have prevented them from selling any more lots at Nobles Hill Estates, their Darlington property. The dispute with the title company is unresolved, while Stewart represents the couple in their title appeal.

The case involves complicated agreements made by members of the family that formerly owned the Nobles Hill property, the protracted legal appeals system, and the stretched credit of the Duncans in trying to develop that land for quick resale.

But the episode also illustrates that title insurance is no panacea, even though it covers fraud, forgery, recording errors, easements and pending claims against the property. It may not cover other things that affect the value or use of the property, however. And if the title insurer chooses to defend the title in court, instead of promptly paying off claimants, the property owner may stand to lose considerable resources in the interim.

Title insurance has long been controversial in Maryland because of its relatively high costs. But it can provide valuable protection for real estate buyers who run afoul of problems, as long as they recognize the limitations. Full understanding and plain-language disclosure of that coverage is the joint responsibility of the property buyer and the title insurance company.

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