The Buyer Who Thought the Lender's Policy Was Hers
Ms. Okafor is buying a 1958 ranch for $410,000 with 20 percent down. At closing the settlement agent quotes $1,350 for a lender's policy and $475 for a simultaneous owner's policy. She declines the owner's policy: "my lender is covered, so I'm covered." Four years later she learns that the deed from her seller was signed by an attorney-in-fact under a power of attorney the grantor had revoked two months before it was used. The grantor's estate demands possession and sues her to quiet title. The loan is current, the lender's policy is in force, and Okafor has only made scheduled payments, leaving a $318,000 principal balance.
1. Allocate the loss between Okafor and her lender, and explain precisely what she misunderstood about the lender's policy.
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What the lender's policy insures. Only the mortgagee's interest in the property as collateral for the debt. The insured is the lender; the loss payable clause runs to the lender; the amount of insurance decreases as the loan amortizes.
How the loss falls if the estate prevails:
- The insurer pays the lender its outstanding principal (here about $318,000, within policy limits), because its security has failed.
- Okafor is not an insured under that policy. She loses the land, her $82,000 down payment, her principal payments, and the improvements she made, and recovers nothing from the title insurer. Her only recourse is against the seller on the deed warranties and against the attorney-in-fact/notary.
What the $475 would have bought. A simultaneous owner's policy insures the fee interest for the full purchase price (plus any inflation coverage), runs for as long as she or her heirs hold title, has no expiration date, and imposes on the insurer the same duty to defend - so the insurer, not Okafor, would have hired counsel in the quiet-title action.
Diagnosis of the error. "My lender is covered" confuses the collateral with the ownership. The lender's policy protects the lender's money; only the owner's policy protects the buyer's equity. The cheapest line on the settlement statement was the only one that insured her.
2. Assume she had paid the $475. Analyze whether the estate's claim is covered and describe what the insurer could do about it.
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Coverage. The claim is a defect in, or adverse claim to, the insured title existing at Date of Policy and arising by, through, or under a predecessor - the classic covered risk. Revocation of the power of attorney means the attorney-in-fact conveyed nothing, so the seller never owned the lot and neither did Okafor. Nothing here falls within an exclusion; the insured's lack of knowledge is irrelevant in an owner's policy.
The insurer's options under the conditions:
- Defend. The duty to defend is measured by the allegations and is broader than the duty to indemnify. The insurer retains counsel and controls the litigation.
- Cure. Buy out the estate's interest, negotiate a quitclaim, or bring its own quiet-title action to clear the record.
- Pay. Pay the policy amount (purchase price plus any escalation) and take an assignment of the insured's claim.
The insurer chooses the remedy; the insured cannot compel a particular one. Where the estate's interest is worth less than the policy limit, expect a negotiated settlement and a deed from the heirs, with the insurer bearing the cost and fees.
3. Two years into the dispute she asks (a) whether she can now buy an owner's policy to cover the estate's claim, and (b) whether she can take over the lender's policy if she pays off the loan. Advise her.
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(a) No retroactive coverage. An owner's policy is underwritten at acquisition, against an unknown risk pool. Once the estate's claim is known and pending, the defect is not insurable: the insurer would decline, or would issue a policy with a specific exception naming the estate's claim - which removes the only thing she needs. Title insurance is not sold to cover known, existing controversies.
(b) No conversion of the loan policy. The loan policy insures the lender's security interest. When the debt is satisfied, the insured interest ends. ALTA loan policy forms permit transfer only to a successor owner of the indebtedness (someone who purchases the note), on the policy's stated conditions - not to the borrower for her own fee interest. Paying off the loan extinguishes the coverage; it does not convert it into owner's coverage.
What to tell her. Her remedies are contractual and tortious against the seller, the attorney-in-fact, and possibly the notary and the agent's E&O carrier - not against a title insurer that never insured her. Close by noting the underwriting lesson: the simultaneous owner's policy costs a fraction of the loan policy precisely because the risk is shared, not because the coverage is redundant.