Do I need Owner’s Title Insurance on a New Construction?
Title insurance is a form of indemnity insurance that protects the holder from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender’s title insurance, in which the borrower purchases coverage only to protect the lender. Owner’s title insurance protects the homeowner’s rights and interests in the property. It is a one-time fee that a purchaser pays to ensure that should his property later have a claim for a lien, encumbrance, or other claims, his title insurer will handle defending the matter.
As discussed in a previous article, there are many important reasons why someone buying a home should get owner’s title insurance. However, many consumers believe that owner’s title insurance is not necessary if they are purchasing property with a new home construction.
The first concern when purchasing a new home construction is the potential of contractor’s liens. A contractor’s lien (often known as a mechanic’s lien, or a construction lien) is a claim made by contractors or subcontractors who have performed work on a property, and have not yet been paid. A supplier of materials delivered to the job may also file a mechanic’s lien. In some states, professionals such as architects, engineers, and surveyors may also be entitled to file a lien for services rendered on a home improvement project. (See the LA Private Works Act).
For example, say a lien is properly filed, but due to an error at the clerk of courts office (misfiled, etc.), it is not discovered during the title search. In this instance, the lien holder may still assert their rights. In another example, a vendor who a contractor failed to pay may still file a lien after the purchase of the property by the new owner. Without owner’s title insurance, the homeowner would be forced to defend their ownership rights on their own dime.
Even though a home is a new construction, the land has been around for a long time. Often a large parcel is later subdivided, and the parcel as a whole could be subject to claims not discovered in the title search. For example, a brother of whomever originally sold the parcel now claims the land is partially theirs. In order to remove this claimant from the title, the new owner would have to get the brother to issue a “quitclaim”, granting full ownership to the owner, or the owner will have to purchase the claimant’s portion. (see more on quitclaim here)
Another potential risk is an unknown servitude, or a “burden” on the property. This is known as an “easement” in other states. A common servitude is a utility servitude, where a utility company may access your property to service utility lines. Other such servitudes are right of way or right of passage, pipelines, and mineral servitudes. Most servitudes are permanently attached to the property, so a property owner is subject to them whether they know about it or not.
For example, homeowner purchases their new home construction with plans to build a swimming pool. Sometime later, the parish sanitation company informs the homeowner that they have a servitude to run a sewer line though their backyard, right where the pool was planned. Not only does the sewer company have the right to install the sewer line without the owner’s permission, the dream pool can no longer be installed.
In conclusion, don’t gamble on such an important purchase; buy owner’s title insurance. The one-time premium you pay is significantly less than what you could spend in legal fees to defend your interests, especially when there is a possibility you could lose your property.