Failure to Buy Title Insurance can be a Costly Mistake

Title insurance has become so common now in real estate transactions that its existence is almost taken for granted, but it is not always obtained,. Sometimes property purchasers deliberately decline to purchase a title insurance policy and, in order to save a few dollars, rely instead on the accuracy of the state of the title as described in a preliminary title report, which is usually obtained during escrow in anticipation of issuance of the policy of insurance.

However, a preliminary report is not the same as an insurance policy and does not provide the protection given by insurance. There may be a defect in the state of the title to property which is not revealed in the preliminary report but which will be found and revealed before the insurer issues its policy of insurance. If the insurer issues its title policy without excluding the defect, the insurance purchased is designed to protect the insured purchaser. If no policy was obtained, the purchaser has no such protection.

The 1996 Court of Appeal decision in Siegel v. Fidelity National Title Insurance Company shows that the failure to purchase a title insurance policy can have disastrous economic consequences.

In the Siegel case, a woman had established a trust which held title to a duplex property. Her sons, Edward and Howard Siegel, and their half-brother, George Liebman, were equal beneficiaries of the trust. After their mother's death, the Siegel brothers agreed to purchase Liebman's interest in the duplex for $150,000.00.

The Siegels hired a mortgage broker to obtain a loan, the broker opened escrow, and Fidelity National was selected to provide title insurance. However, Fidelity was instructed to provide only an American Land Title Association ("ALTA") lender's policy and not a California Land Title Association ("CLTA") buyer's policy. Fidelity did, however, prepare a preliminary report, which was given to the Siegel brothers.

The escrow proceeded without incident. The mother's trust deeded title to the duplex to the three brothers as tenants in common, and Liebman thereafter deeded his interest to the Siegels for their $150,000.00 payment.

What the Siegels did not know was that during the course of the escrow a man named Steven Jacoby had obtained a money judgment in excess of $100,000.00 against Liebman. To enforce his judgment, Jacoby had recorded an abstract of judgment with the county records, thereby placing a lien on any interest owned by Liebman in any real property located in that county.

As a result, when Liebman went into title to the duplex, Jacoby's judgment lien attached, and the lien remained on the duplex after Liebman deeded his interest to the Siegels. That means that Liebman's interest in the duplex was really worth only $50,000.00 at the time he deeded to the Siegels, notwithstanding their payment of $150,000.00.

Fidelity's preliminary report contained no reference to Jacoby's abstract of judgment and resulting lien. The Siegels learned about Jacoby's judgment months later, when he sought to enforce his claim against the duplex. Liebman later filed for bankruptcy protection.

The Siegels filed suit against Fidelity for breach of contract and negligent misrepresentation, on the theory that they were entitled to rely on the preliminary report and that Fidelity had failed to issue a title insurance policy in accordance with an agreement between the parties. They obtained judgment at trial against Fidelity, and Fidelity appealed.

The Court of Appeal reversed, holding that the Siegels were not entitled to rely on the preliminary title report alone. As the court explained, "a party who fails to obtain title insurance and instead relies on a preliminary report showing no encumbrances does so at his own peril and cannot thereafter maintain an action against the insurer when an undisclosed lien comes to light."

The Siegels saved a few dollars by not purchasing a title insurance policy but left themselves exposed to the claim of a judgment creditor for $100,000.00. This case clearly demonstrates the truth of the old adage that "an ounce of prevention is worth a pound of cure."

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© BRIGIT S. BARNES & ASSOCIATES, INC.

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