Does title insurance cover an error the title company made in payoff on the sellers mortgage?

Answer 1

Short answer: No. Long answer: The title policy covers "clouds" on the title. Meaning an illegal transfer, sale of a piece of property without consent of all owners, alternate claim to the title. etc. The title policy covers the title of the property from soveriegnty (when the U.S. obtained the property from whatever country) until now. If the lender was never paid and for some reason cannot collect from the original borrower, the outstanding mortgage would certainly be a cloud on the title. And if it was not paid due to an error by the title insurance company, any damages suffered by the lender, purchaser, or seller of the property should be covered by the company's "errors and omissions" commercial insurance. In most states, the Title Insurance UNDERWRITER, (not the agency), issues a Closing Protection Letter (CPL)insuring the acts of the title agency or attorney acting as Settlement Agent. The Settlement Agent is the party in the transaction that is receiving and disbursing funds for transaction, including receiving the bank funding for the borrower. The Settlement Agent could be a title agency or an attorney in most states. (CA and some other states use escrow agents in lieu of a Settlement Agent.) The settlement agent is typically responsible for paying off the seller's mortgage in a purchase transaction, unless otherwise stipulated and agreed to in the sales contract and approved by the title agency and the Underwriter insuring the Policies. If the settlement agent makes an error in paying off the seller's mortgage, whether it be a shortage, delayed payment incurring additional per diem interest or blantant negligence in paying off the mortgage timely, the OWNER'S POLICY AND the LENDER'S POLICY would cover those acts under the issuance of the CPL. The Lender's Policy insures that the new loan will be in 1st Lien Position. If the previous owner's mortgage has not been paid and satisfied of record, it is a claim. The Owner's Policy insures that the new owner has clean title against previous liens. Ditto on the above. If the old mortgage is not paid and discharged of record, it is a claim. The Agency's E&O (Errors and Ommissions Insurance) may or may not cover negligence to perform responsibly as the settlement agent, however, the Underwriter's issuance of the CPL DOES cover such negligence. Therefore, the answer is YES as long as the INSURED (Lender or new Owner) suffered real damages from the error. Can the Seller file a title claim for an error in payoff? They could, but since they are not the INSURED, it would probably end up as a lawsuit vs a title claim. A Seller Claim really depends on what actual DAMAGES they suffered. The written payoffs obtained by the Mortgage Holder are not guarenteed by the Mortgage Holder, as they usually have a disclaimer in the payoff stating the amount can change at any time, at will by the Mortgage Holder. If a written payoff was obtained, updated timely in relationship to the closing date and funds were sent based on the most recent written payoffs, the Settlement Agent has acted in good faith in transferring the funds using the most recent figures. However, if the Lender comes back after receiving the funds and says the payoff is short for any reason, it is still the responsibility of the SELLER to come up with the funds needed to satisfy the loan. The only exception to this would be that sending of funds was delayed by the Settlement Agent past the written "good through" payoff date or an updated payoff statement was not obtained by the Settlement Agent 24 hours prior to closing, resulting in a shortgage. If the mortgage was not paid at all, then yes, this would be a valid claim as the Seller suffered real damages and the Seller may be able to join in the same claim that would be filed by the Lender and the Owner.