Getting Title Insurance? Don’t Assume a Property’s Physical Conditions Are Covered

A few months back, an interesting case came out on Georgia title insurance law. It clarified the allowable claims against title insurance. People buy title insurance on closing day to guard themselves against unknown title problems affecting a property’s market value.  

That is, a title policy exists to protect a deed holder’s marketability of title. At its essence, it protects the policy holder in case the legal rights of homeownership are in question.

Title insurance does not guard the deed holder from physical defects on the property. Those, said the court, relate to economic marketability.

What are physical defects? In this case, the issue was the inability of a deed holder to get a construction permit.

What Happened in the Georgia Court Case?

In early 2024, Reginald Luster bought a home in Fulton County, Georgia.

At closing, Luster opted to buy an owner’s title insurance policy from the Investors Title Insurance Company to protect his ownership interest against any unknown title issues that could arise. Luster’s policy said it covered “loss or damage…sustained or incurred” by an unmarketable title.

Now, what would “unmarketable title” actually mean? The language of the policy laid it out. It defined unmarketable title as involving some issue that would allow a prospective buyer or renter to walk away if the parties’ contract specifies that the title must be marketable.

About a month after closing, the real-life meaning of this language would be put to the test.

Luster wanted to install a septic tank. He applied for a residential building permit to allow the work to happen. The local government refused to issue the permit. Why? Because Luster’s subdivision had access to nearby sewer lines. The subdivision’s developer neglected to connect them to the home. Luster didn’t know this when he bought the property. And now, he needed a septic tank but couldn’t get one.

Luster filed a claim with the title insurer. The insurer denied the claim. Luster took the company to court.

The case was decided in the U.S. District Court for the Northern District of Georgia. The issue before the court was whether a property’s physical defects affect “marketability of title” and are therefore covered by title insurance under Georgia law.

Luster argued that he had indeed purchased an unmarketable title, as the home had a defect serious enough to make any potential buyer who knew about it walk away. He himself would have walked away. If only he’d been aware that a residential building permit would be denied based on the condition of the property, he would have told the seller to release him from the purchase contract.

A Win for the Title Insurers

The court rejected Luster’s position. The judge said a deed holder couldn’t expect the policy to cover just any defect that might turn off a potential buyer. A problem with the physical state of the property, no matter how serious, is not automatically a title defect.

The court looked at similar cases that have been decided in Georgia. The Georgia courts have treated title and property ownership differently from defects in the physical condition of a property. That is, physical defects that do not affect the ability to transfer legal ownership don’t make a title unmarketable. The lack of sewer access and the lack of permit availability would not stop the deed holder from transferring ownership to some other party. To help this make sense, recall that a title policy essentially protects the policy holder in case the legal rights of homeownership are in question.

The insurer prevailed. Luster received no aid from the court. The court decided that Luster had not suffered a loss that the insurance policy covered.  So, the court simply  granted the title company’s motion to dismiss Luster’s claim against the insurance policy.

A Recent Case in Pennsylvania Produced a Similar Outcome

In another recent decision, the Superior Court of Pennsylvania heard from a deed holder who bought a property in the Philadelphia suburbs in the 1970s—along with a title policy. Nearly 25 years passed. Then, the deed holder came across an old septic tank in the front yard. Suddenly, it was time for a costly remediation job.

It turned out that the documentation for the septic tank was on file with the township. Presumably, the title company ought to have noticed it before closing.

The deed holder filed a title insurance claim. Why, he asked, hadn’t the insurer notified the home buyer of the issue? He pointed to the policy language that said any “defect” on the title would be covered.

As you might guess by now, the insurer rejected the claim.

Now, the deed holder would have to disclose the problem to a potential buyer. That would take the value of the property down a notch. The homeowner sued.

On appeal, the Superior Court agreed that the property value was diminished. But the title wasn’t.

A Number of States Have Similarly Sided With Insurers

It was a novel question in Pennsylvania: whether a physical defect on the property was covered by title insurance. The court looked to other states’ cases to formulate its own decision.

• The Massachusetts Appeals Court has held that title insurance covers defects “pertaining to the record title to the premises, not its physical make up.”

• The New York Supreme Court said sanitary code violations aren’t encumbrances on the title. They do not constitute a title marketability claim.

•  The Supreme Court of Washington decided a similar case likewise.

In turn, Pennsylvania’s Superior Court has concluded that the title insurance company’s role is to protect the condition of the title, not the property itself.

It’s possible that you live in a state where courts have held the insurer’s duty to a broader standard. But we see multiple recent cases siding with insurers here. And this is something a buyer who opts into title insurance at closing should know.

Title Endorsements: Which One Applies?

Purchasing endorsements can expand a policy’s protection. Attorneys at the Riker Danzig law firm point to several title policy endorsements that could support a policy holder in cases of property value loss involving physical conditions. Looking at the American Land Title Association’s policy offerings, they suggest endorsements that cover:

• Zoning.

• Utility access.

• Easements and encroachments.

• Identified risks.

Other endorsements might apply. Before opting into title insurance, you may want to speak with a title expert about the law in your state, and related recommendations.

Can a home buyer get physical issues covered by the title policy? To create that protection, a home buyer must ask to purchase an additional endorsement for their owner’s title policy.

When Title Insurance Does Pay Off

Title insurance is not a catch-all safety net—but it is not useless either. It serves a very specific purpose, and when that purpose is triggered, it can be extremely valuable.

A policy may provide real protection in situations like these:

• An undisclosed heir claims ownership.
  If someone emerges with a legitimate ownership interest that was not discovered during the title search, the policy can cover legal defense costs and any resulting loss.
• A forged deed exists in the chain of title.
  If a past transfer was invalid due to forgery, your ownership could be challenged. Title insurance can step in to defend the claim or compensate for the loss.
• A prior lien or mortgage was missed.
  If an old mortgage, tax lien, or judgment was not properly recorded or released and later surfaces, the policy may cover the cost to resolve it.
• A recording error affects ownership rights.
  Clerical mistakes in public records can create real ownership disputes. These are the types of defects title insurance is designed to address.

In each of these examples, the issue is not the physical condition of the property. The problem is that someone else may have a legal claim, or the ownership record itself is flawed.

That distinction matters.

Title insurance protects the validity and transferability of ownership. It does not guarantee that the property is usable, buildable, or free from costly physical issues. Those risks fall outside the scope of the policy unless additional endorsements are purchased.

Understanding that boundary is the difference between being properly protected—and being surprised later.