Insurable Vs. Marketable Title

April 21st, 2011

In recent years, with the increase in bank owned/foreclosed properties being sold, we are seeing more instances where the Seller is using an Addendum to Purchase & Sale wherein it states that the seller agrees to provide, and the buyer agrees to accept, insurable title instead of the customary marketable title.

If you are considering purchasing a bank owned property, or any property where insurable title is mentioned, it is important that you understand the distinction between insurable title and marketable title because you may end up owning a property with a title defect that limits your ability to sell or refinance down the road.

Marketable title is understood to mean a title that has no defects or issues to which a reasonable buyer could object.  Marketable title is sometimes also referred to as being a ‘clean’ title.  In the real estate world, it is considered a better title because it has no defects that could potentially jeopardize a future sale or refinance of the property.

Insurable title is understood to mean a title that does have a defect or issue but a title insurance carrier has reviewed the title, made a risk assessment, and has agreed to insure the title without the defect or issue being resolved.  In essence, the title insurance carrier has agreed to insure over the problem so that the transaction can proceed.

The easiest way to understand this distinction may be to consider the quite common situation where a title search reveals an unrecorded/missing mortgage discharge from an earlier transaction.

If the Seller has agreed to provide marketable title, the missing discharge is a title defect that the seller must resolve in order to provide clear the title to the buyer.

However, if the Seller has agreed to provide insurable title, and a title insurance carrier is willing to provide title insurance coverage for the missing discharge issue, the new buyer cannot force the seller to fix the defect and the buyer will end up owning the property with the missing discharge defect still in place. When the buyer goes to sell or refinance the property in the future, that missing discharge issue will still exist, and depending upon the circumstances he/she may be forced to incur the costs of having to fix the problem and depending upon how long it takes to resolve the issue, may risk jeopardizing the sale/refinance transaction.    

Questions?   Give us a call.  603-431-8100.