Title insurance operates to protect an owner in the event of any defect in title that may prevent him or her from clearly owning the property, or from any encumbrances or liens the prior owner may have had on the property that are not disclosed. For example, in the event a lawyer makes any errors in transferring title or the transfer is found to be fraudulent, the title insurance company will typically step in and reimburse the owner for any financial loss. However, the discovery of such a defect in title does not render the title insurer immediately liable to pay the insured. Depending upon the title insurance contract, the insurer may have various means of satisfying its obligations to the insured.
Generally speaking, title insurance policies are contracts of indemnity. However, current views of title policies provide insurers with several different methods of satisfying their obligations. Title insurers have the ability to determine which of these methods they would prefer to utilize, though care must be taken when making the determination as any inaction can be found to be a breach in bad faith.
Most obvious is the insurer’s ability to pay the full policy amount to the insured, or pay to the insured the actual amount of loss. For example, if damages are extraordinary, the full policy amount may be in order. Where damages are smaller, the reduction in value of the owner’s property may be a more appropriate award. The insurer may also negotiate and settle directly with the insured for an agreed upon amount, or it may at its option negotiate with third parties to settle a claim. Third party negotiations may become necessary where the action proceeds to litigation. In such an instance, the insurer may not only settle with third parties, but has the option of defending the claim in court. Similarly, the insurer may pursue compensation from third parties to reduce the insured’s loss.
In addition to making efforts to settle monetarily and recompense an owner for damages, the insurer may take affirmative action to clear the defect, and thereby eliminate any damages to the owner. An insurer who successfully clears title is not thereafter liable to the insured for any monetary sums.
In a modern homeowner’s policy, the insurer typically has the ability to pay the amount of insurance then in force for a covered risk for which the policy provides maximum limits and deductibles. If a title insurer elects to pay in this manner, it also must pay the insured’s rent for a “reasonably equivalent residence” if the insured is forced to vacate while the claim against the title is being removed or being investigated and paid, together with “reasonable costs” to relocate the insured’s personal property.
Once the insurer has performed in one of the ways listed above, the insurer is not contractually obligated to do more. However, a title insurer who fails to perform in any of the methods accepted is in breach of contract and can be sued by the insured for not only amounts due under the policy, but consequential, incidental, and punitive damages as well. It has been held that an insurer has the option to investigate whether title defects can be cured, however, when it takes no action to cure the defect, it can be held liable for breach of contract in bad faith.