(Published in the Idaho Business Review, December 2007)

            When buying real estate, the buyer has a choice between “standard” and “extended” coverage title insurance.  For commercial and industrial properties, extended coverage costs an additional 50% in premiums over the cost of standard coverage.  In addition, the title company will likely require a current ALTA/ACSM survey, which could be expensive depending on the size, location and complexity of the property.  Sometimes the transaction can be negotiated to require the seller to pay the additional costs, but frequently they will be the buyer’s cost.

 Standard coverage insurance insures that the buyer has obtained marketable title to the property, subject to liens and encumbrances against the property appearing of record, and that the property has access to a public road.  Generally, standard coverage provides little or no protection against title defects not shown by the public records.  The protection in both standard and extended coverage policies is limited by certain exclusions.

The protection in a standard coverage policy is also limited by six “standard” exceptions in the policy.  Generally, all six standard exceptions are deleted from an extended coverage policy, and the insured will have protection against any claim associated with the deleted items.  However, additional exceptions to coverage may be added to Schedule B of the policy as part of the process of issuing extended coverage insurance.  The buyer must evaluate whether there is a significant risk of loss posed by one of the six standard exceptions against which the buyer would be protected by purchasing extended coverage, and whether that risk outweighs the cost of the extended coverage.

For the purpose of this article, I have grouped into two primary areas the six standard exceptions that are generally deleted as part of obtaining an extended coverage policy.  The first area pertains to unfiled mechanic’s liens (sometimes called “lien” coverage).  If work has been recently performed on the property, persons who furnish labor or materials have the right to lien the property for 90 days after supplying their work or materials.  Standard coverage provides no protection for mechanic’s liens filed after the policy date for work performed prior to that date. 

In Idaho, it is difficult to determine the persons who have supplied labor or materials to the property within the past 90 days, all of whom have lien rights.  Unlike some other states, Idaho requires no pre-lien notice by contractors, subcontractors or suppliers, so potential lien claimants cannot be determined from reviewing the public records.  A lien release from the seller or general contractor will not prevent liens by unpaid subcontractors, suppliers or laborers.  The buyer could be in the unenviable position of having to pay subcontractors or suppliers even if the general contractor has been paid in full.  The potential of a devastating loss and the inability to determine the extent of the potential lien rights as of the policy date makes the buyer’s decision to obtain extended coverage for new construction an easy one.

The second primary area of additional protection provided by extended coverage is sometimes called “survey” coverage.  Standard coverage provides little or no protection for typical boundary disputes, fence or building encroachments, unrecorded easements, or rights of parties in possession.  Evaluating the risk of not obtaining survey coverage is difficult.  As part of the transaction negotiations, the buyer should obtain from the seller copies of any existing surveys, which should be carefully reviewed.  In any case, the property should be inspected for apparent encroachments and unrecorded easements.  Look for roadways, joint drives or indications of utility easements.  It is often impossible to determine the existence of encroachments or other boundary line issues without a survey.  The buyer should obtain the seller’s promise that there are no encroachments, boundary line issues, easements or parties in possession not shown by the public records.  In common practice, residential properties are rarely surveyed and commercial and industrial properties are often surveyed.  For some property (particularly residential), the title company may be persuaded to issue extended coverage without a survey, based upon its own inspection.

Whether a buyer desires to accept the risk of a title claim that might otherwise be covered by extended coverage also depends on the buyer’s attitude toward risk.  Some buyers are cautious and would rather pay the cost to avoid risk.  Lenders also drive the extended coverage purchase decision.  Institutional purchasers and trustees will usually purchase extended coverage because they are dealing with the assets of others and believe it is inappropriate to take unnecessary risks.  The size of the transaction can be a consideration.  Some buyers are willing to take a gamble on a small transaction, but not on a large one with the potential of a crippling loss.

If, after an analysis of the risks, the decision is made to purchase extended coverage insurance, the title company will have certain prerequisites (in addition to the ALTA/ACSM survey) before it will issue the extended coverage.  In order to obtain “lien” coverage for newly-constructed property, the seller and/or the contractor will need to furnish the title company with satisfactory evidence that all construction costs have been paid or will be paid.  The title company may also insist on a financial statement from the seller and/or the contractor.

By understanding the different risks covered by standard and extended coverage insurance, the buyer can make an informed choice whether the additional cost of extended coverage is worthwhile.  In any event, the issue of extended coverage should be discussed with your title company and real estate counsel.