Title Claim and Remedies
What Happens if there is a Claim.
If a defect is discovered and title claim arises, several things occur. First, a claim is filed with the insurance company. The insurance company opens a claim file and contacts the attorney or abstractor that performed the title search. Second, the attorney or abstractor reviews the file to see if there is some reasonable explanation for the defect or if it can be easily fixed (usually the defect can be fixed at this stage). If no easy fix to the defect is possible, third the attorney or abstractor contacts their malpractice carrier. Fourth, the title company will then make a business decision based on the circumstances of the claim and their relationship to the attorney or abstractor. The title company may:
1. Pay off the claim, if applicable and it fixes the defect, and close the file.
2 Pay off the claim, if applicable and it fixes the defect, and sue the attorney or abstractor for the damages.
3 Fix the defect by court order or by cooperation of the parties.
4 Deny the claim if there is a reasonable basis to do so.
My experience with well run and reputable companies is that they will first try and fix the problem. They will try and get all the parties to agree to a fix, work with the attorney, if one is involved, and have the necessary documents signed and filed that correct the defect. In the real world, this benefits everyone. Usually defects are unintentional. They occur because something was simply overlooked. They can all be fixed if everyone is reasonable.
The title company may also work with the attorney or abstractor and ask the court to cure (fix) the defect by court order. This is done by showing evidence to the court that all the parties understood that the land transaction was to be a certain way but the records failed to produce the desired result. In other words, the court will put the parties in the position that they all intended but failed to do. The documents failed to show the desired results so the court will order the result. This is called a "Quiet Title" action and is used more often than you would think.
If all else fails, the insurance company will pay the claim, up to the policy limits, and sue the attorney or abstractor for negligence performed in the title search. Again, this is a last resort for the reputable title companies. No one wants this result as it is expensive and time consuming. It eats up resources that are better used elsewhere. Also, as a practical matter, the title insurance company relies on the attorney and abstractor for business. Suing a business referral source usually does not make good business sense. But depending on the circumstances (amount of money involved vs. the amount of referral business) the title company may not have a choice but to pay the title claim.
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