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TITLE INSURANCE COVERS ONLY THE PROPERTY DESCRIBED IN THE PURCHASE AGREEMENT

A description of what is being bought and sold is, of course, an essential part of any purchase and sale contract. One disappointed land Buyer found out the hard way in a 2012 Court of Appeal decision that, due to a vague description of the property, the title insurance policy did not insure title to one of the parcels the Buyer thought was included in the sale.

The purchase agreement described the land being purchased as "all property owned by [the Seller] recorded on the following . . . County maps". The agreement then listed various tax assessor maps by number. One 40 acre parcel shown on the maps had been owned by the Seller, but was sold to someone else before this Buyer's purchase agreement was signed. Unfortunately for the Buyer, the title company erroneously included the parcel in the preliminary title report. Apparently, neither the parties nor the title company noticed the error, so the parcel was also included in the deed and in the Buyer's title insurance policy.

It is reasonable to think that this Buyer should have a claim under his title insurance policy, but the Court held otherwise. The Court's analysis turned on the fundamental requirement that a Buyer must have at least a contractual right to own a property in order to have an insurable interest in the property. The Buyer in this case never had an insurable interest in the parcel, because the Buyer contracted to buy only the properties "owned by" the Seller and the Seller no longer owned the parcel in question at the time of contracting.

As a result, the Buyer's title insurance policy was held to be void with respect to the 40 acre parcel and the title company had no liability to the Buyer for that parcel. Although not addressed in the case, title companies are also typically not liable for errors in a preliminary report, based on the express terms of the report, regardless of whether the Buyer relied on the preliminary report in determining whether to purchase a particular property.

The lesson learned from this case is to avoid using a general description of property being purchased. Describing a property by street address or assessor's parcel number is not ideal, because it creates a potential inconsistency with the legal parcels that will be insured under the title policy. A purchase agreement should describe each parcel being purchased by lot number, metes-and-bounds, government survey or a combination of these methods. The Buyer should also obtain and carefully review a survey of the property, and have the title policy endorsed to insure the Buyer's legal title to all of the property depicted on the survey.

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