Unexpected Real Estate Title Defects: How to File a Claim With the Insurance Company

Image of a dirt path through the woods leading to a greenhouse.

Much is said on the role of title insurance in protecting protect the buyer from unknown liens, easement holders, or a prior owners’ heirs who claim an interest in the buyer’s new home. 

Title insurance covers the policy holder against loss related to these various defects in title. Other examples of title defects include undisclosed restrictive covenants on the property, documents recorded with mistakes, and fraudulent or otherwise invalid transactions in the chain of title. A good title insurance policy protects the policy holder against property devaluation stemming from such problems if they arose during a previous ownership, unbeknownst to the buyer. The role of the title insurer is to defend the policy holder against legal challenges to the title, and to pay the policy holder for covered losses in value.

So far, so good.

But what happens if there is a title defect, and the owner actually has to use the title insurance? 

“In the Interest of Justice”: Seeking Recourse for an Unexpected Easement

The Washington state supreme court, in 2016, dealt with a recorded easement in Millies v. Landamerica Transnation. After Susan and Richard Millies closed on their dream retirement home, they learned that a recorded easement on the property permitted the public to use a roadway through it, and that a neighbor planned to develop 50 condos and to use that roadway for public access. The title insurance company acknowledged having missed the easement, which greatly devalued the home. The Millies refused to take the company’s settlement offer. So they sued—and got nothing.

Unluckily for the Millies, the jury returned a verdict that the title company had not breached its insurance contract. That determination withstood an appeal, although the dissent noted that a procedural error should have triggered a different outcome “in the interest of justice.”

So, does a homeowner have any recourse through the insurance contract for a previously unknown easement?

Here are the steps to take in this situation. 

Step 1: Look for the Easement in the Property Records and Title Commitment

What if the title company misses an easement that was subject to an agreement between a prior homeowner and a third party? The new homeowner finds out about the deal when, suddenly, the utility company wants to set up equipment on the property, or the city wants to put a sidewalk or sewer over part of the front lawn. 

The first step is to examine the property records. Was the easement recorded in the county? Is the easement evident in the title commitment, notifying the buyer that the issue existed and could be problematic?

Step 2: Assess the Terms of the Easement

There is little reason to do battle if the easement is simply temporary. Read the easement to find out if it only involves, for example, a right to traverse the property for one, specific project with a set completion date.

Of course, many utility companies have easements on home properties for installing and checking lines, pipes, and meters. Some are normal and necessary.
But if the easement holder intends to construct improvements or install equipment on or under the land, substantially decreasing the homeowner’s property value, a battle to recover the diminished value may be necessary. 

Step 3: Seek Legal Advice

Once the surprised homeowners know whether they’re dealing with a recorded or unrecorded easement, they can hire an attorney to advise them.

Legal representation can be pivotal in bringing about a fair outcome. This is true even if the buyer never steps into court. To the buyer, a claim can appear straightforward. Yet the title company may have arguments against the claim, based in its interpretation of contract law.

There is also the matter of who pays additional costs of addressing the easement. For example, the title company may send a survey company to the home to examine the easement. Does the title insurance claim help with extra costs, as well the diminished value in the property?

And what timing and deadline requirements are involved in filing the claim?

An attorney experienced with easements will ask questions the buyer might not have anticipated. 

Step 4: File a Claim

If the title policy fails to disclose a properly recorded easement, the home buyer can file a claim against the title company for failing to find it.

The seller may be at fault for agreeing to, but not disclosing, an easement.  

It’s possible that the prior owner received a payment from the utility company, the city, or another party, yet signed the closing paperwork declaring the title free of encumbrances. In such a case, the buyer was paid twice for the very same stretch of land: first by the easement holder, and then by the home buyer. Thus, actual damages can be calculated: the property value lost because of the easement.

The best approach, typically, is to submit a claim to the title company, and let the company approach the seller. 

Step 5: Anticipate Legal Action

Ultimately, the home buyer’s claim with the title company might prevail. But title insurance contracts have schedules of exclusions and exceptions. The company may insist the easement is not covered, and thus there is no breach of contract should the company decline to pay out. Sometimes a payout limit means the title company will not fully cover the lost value. 

Then, the buyer must decide whether to go to court.  

Long-Term Considerations

Always check the law in your state. An unrecorded easement might not be effective against the bona fide purchaser, but might be effective against future buyers, and thus a detriment down the road.  And, speaking of the future, hold onto your insurance policy, even if you transfer the title to a new owner. As a general rule, title insurance lasts as long as the buyer and the buyer’s heirs hold the property. Additionally, a policy might be good indefinitely for title warranties made by the policy holder when selling the home.

Supporting References:

Texas Department of Insurance: https://www.tdi.texas.gov/title/titlefaqs.html

Millies v. Landamerica Transnation Dba Transnation Title Ins. Co., 372 P.3d 111, 113 (Wash. 2016). Available at: https://casetext.com/case/millies-v-landamerica-transnation-dba-transnation-title-ins-co

Discussion of Millies by Rand L. Koler: http://www.kolerlaw.com/2016/04/07/be-careful-when-suing-the-title-company/

Photo by Gor Davtyan via Unsplash: https://unsplash.com/photos/zkINKT7qnhM