In my article on surveys and ILCs, I explained how buyers might think through whether to obtain a survey, an ILC, or neither. Here, we’ll look at how title insurance, Owner’s Extended Coverage (OEC), and Survey Matters fit into that same risk-management discussion.
What Is Title Insurance?
Most forms of insurance protect against future events. Homeowners’ insurance may help protect against future losses such as fire, hail, or wind damage. Auto insurance may help protect against future accidents. Health insurance helps cover future medical expenses.
Unlike most insurance, title insurance protects against certain problems that existed before or at the time you purchased the property, even if those problems are not discovered until years later.
For example, there could be an undiscovered lien, an error in a legal description, a recording mistake, a previously unknown ownership issue, or another title-related defect that was not identified before the transaction closed. The title company researches public records and investigates the property’s history before issuing a policy, but no investigation is perfect. Title insurance exists because there is always the possibility that an issue exists that was not discovered beforehand.
The Two Title Insurance Policies You May See at Closing
When you close on a home, if you are getting a loan, there will be two different title insurance policies involved: an “Owner’s” title insurance policy and a “Lender’s” title insurance policy.
The “Owner’s” title insurance policy helps protect the buyer’s ownership interest in the property, subject to the terms, conditions, exclusions, and exceptions set forth in the policy. In most residential transactions in Colorado, the seller pays for the “Owner’s” policy.
If you are getting a loan, your lender will also typically require a “Lender’s” title insurance policy. The “Lender’s” policy protects the lender’s interest in the property, not the buyer’s ownership interest. In most Colorado transactions, the buyer usually pays for the Lender’s policy.
Title insurance is a one-time purchase. Unlike homeowners’ insurance, there are no annual premiums. The Owner’s policy is issued at closing and generally remains in effect for as long as the insured owner or their heirs retain an interest in the property. If the loan is paid off, the Lender’s policy terminates. If the property is refinanced, a new Lender’s policy is obtained for the new loan.
What Is the Title Commitment?
Before closing, the title company issues a document called the Title Commitment. The Title Commitment is important because it informs the parties of what the title company is willing to insure, which exceptions will remain, and the requirements that must be satisfied before the final title insurance policy is issued.
The Title Commitment is also one of the buyer’s most important opportunities to review the title insurance being offered. If the buyer believes a requirement, exception, or other title matter is unacceptable, the contract provides a process for raising objections and, if necessary, terminating the transaction.
This is important to our discussion of surveys and ILCs because the Title Commitment indicates what additional coverage the title company is willing to provide and whether any additional requirements must be met before that coverage is issued.
If the title company is willing to provide the requested coverage without requiring a survey or ILC, that is helpful information. If the title company says it needs a survey, ILC, or some other documentation before it will provide certain coverage, that is also important information. Either way, the buyer is not supposed to be guessing at closing. The Title Commitment is reviewed before closing so the buyer can evaluate whether the title insurance being offered is acceptable. If it isn’t, the buyer can object and ultimately terminate the contract.
What Is “Owner’s Extended Coverage” (OEC)?
The standard “Owner’s” title insurance policy provides one level of protection. “Owner’s Extended Coverage,” usually called “OEC”, provides additional protections beyond the standard policy.
One additional area commonly addressed with OEC involves “Survey Matters.” This is one reason OEC matters in discussions of surveys and ILCs. A buyer may decide not to obtain a survey but still wants the title company to provide as much title insurance protection as is reasonably available, including coverage related to certain survey matters.
The cost of OEC is relatively small, usually less than $100. Unless directed otherwise, we ask for OEC as part of the purchase contract and original negotiations. That does not mean the title company will automatically provide every form of coverage in every situation. It means we are requesting it, and the Title Commitment then tells us what the title company is willing to provide and whether any additional requirements must be met.
What Are Survey Matters?
This is where the conversation begins to overlap with surveys and ILCs. In the companion article, we explained that a survey and an ILC both involve the relationship between property boundaries and improvements (again, “improvements” can include houses, garages, sheds, fences, driveways, retaining walls, patios, sidewalks, and similar structures).
Survey Matters, as part of title insurance, involves issues related to the relationship between improvements and property boundaries. For example, imagine that after closing, it is discovered that a fence extends onto a neighboring property. Imagine that a garage encroaches on an easement. Imagine that an improvement crosses a setback line or extends beyond where everyone believed the property boundary to be.
These would likely be “survey matters.” When people talk about Survey Matters, they are generally talking about issues involving the relationship between property boundaries and improvements.
How Does This Relate to Surveys and ILCs?
If OEC provides protection for problems that a survey or ILC might have identified, why would anyone spend additional money on a survey? The answer is that insurance and certainty are not the same thing.
A buyer who orders a survey is often attempting to reduce uncertainty before purchasing the property. A buyer who relies on title insurance accepts that some uncertainty exists but looks to the policy for protection if certain covered issues are discovered later. A survey may help identify certain issues before closing.
A buyer who chooses not to obtain a survey may rely more heavily on title insurance and OEC if a covered issue is later discovered.
Neither approach is automatically right or wrong. Some buyers would rather spend additional money up front to reduce uncertainty. Others are comfortable accepting more uncertainty because they have title insurance and believe the risk is small. The important thing is understanding that those are different ways of managing risk.
Why Would a Title Company Require a Survey or an ILC?
In some transactions, a title company may be comfortable providing Owner’s Extended Coverage without requiring a survey or ILC. In other transactions, that same title company may decide it needs additional information before it is willing to provide OEC.
One way to think about it is this: the title company is deciding how much uncertainty it is willing to accept before issuing the policy. If it believes it has enough information, it may proceed without requiring additional documentation. If it wants more information, it may require a survey, an ILC, or some other documentation before providing OEC.
When that happens, the discussion may shift from whether the buyer wants a survey or ILC to who will order it, who will pay for it, and how it affects the transaction timeline.
In many Colorado transactions, buyers include language stating that if the title company requires a survey or ILC to issue the requested title policy, the seller will order and pay for it. The reasoning is straightforward. If the seller is paying for the “Owner’s” title insurance policy, then the seller is often expected to bear the cost of satisfying the title company’s requirements for issuing that policy.
On the other hand, if a lender requires a survey or ILC for the buyer’s loan, it is common for the buyer to pay for it, as the requirement is tied to the buyer’s financing rather than the seller’s title insurance obligation.
These are common approaches, but, as with many things in real estate, they are negotiable. And for context, in my experience, it is rare for a title company or lender to require a survey or ILC in a typical residential transaction.
Understanding the Tradeoff
The existence of title insurance and Owner’s Extended Coverage (OEC) does not automatically eliminate the need for a survey. They address risk in different ways. A survey may help identify certain issues before closing. Title insurance may provide protection if certain covered issues are discovered later. Some buyers would rather spend additional money up front to reduce uncertainty. Others are comfortable relying more heavily on the protections provided by title insurance.
One final note: I’m explaining these topics based on my experience helping buyers and sellers navigate real estate transactions. I can help explain how title insurance, Owner’s Extended Coverage, surveys, ILCs, and contract provisions typically work in practice and how they fit together within a transaction. What I cannot do is provide legal advice or tell you how an attorney, a court, or a title company would evaluate a specific claim or dispute.