Why do I need to buy both an Owner’s Policy and a Loan Policy?
When you buy real estate with all cash out of your own pocket, and you don’t have to borrow any money to help pay the purchase price, the only title policy you will need to purchase is an Owner’s Policy, since you are the only one with an interest in the property. But if you need a loan to help pay for the property, your lender will require you to sign a mortgage putting a lien on your property to secure the loan. The lender will also require you to buy a title policy insuring their lien on your property, and that title policy will be a Loan Policy. So, the easy answer to the above question is: You have to buy a Loan Policy because your lender requires you to do so.
An Owner’s Policy insures you, as the purchaser and owner, that you own the property, subject to the exceptions and exclusions set out in the policy. A Loan Policy insures your lender not only that you own the property, but also insures the validity, priority and enforceability of the lien of their mortgage, subject to the exceptions and exclusions set out in the policy. The coverage seems like the same, but can be very different.
The Owner’s Policy is issued in the amount of the purchase price of the property, insures the owner that he has good title to the real estate, and will take exception to the purchase money mortgage (among other exceptions) in Schedule B of the policy. A Loan Policy is issued in the amount of the mortgage on the property, insures the lender that the owner has good title to the real estate, and that the lien of the purchase money mortgage is a valid and enforceable lien on the real estate. Because both title policies insure the state of the title, they contain overlapping coverage, and so there is a commonality of risk on both policies. But not only are there different entities insured under the policies, but the interests insured are different.
The Loan Policy insures the lender and lender’s lien on the property, and does not provide any protection or coverage to the owner. There can be situations where there might be a claim under the Owner’s Policy but not under the Loan Policy, and visa versa. An example of the situation where there might be a claim under the Owner’s Policy only would be the case where there is a dispute between adjacent landowners as to the location of the property boundary line. If your neighbor claims that the property line really lies ten feet inside your property, that your driveway is really on his land and he tries to prevent you from using your driveway, that could be a potential loss under your Owner’s Policy of title insurance, and the title company would defend your title as insured. In contrast, in order for the lender to have a loss under the Loan Policy, there must first be a default under the terms of the mortgage that impairs or affects the validity, priority or enforceability of their lien. So long as there is no default in their mortgage, the lender has no claim under its Loan Policy. So in the above claim example, so long as you keep paying your mortgage payments while the title company is defending your title, there is no loss to the lender as there is no default, and therefore, the lender has no claim under his Loan Policy.
Situations where the lender may have a loss triggering a claim under their Loan Policy (but there might not be a loss triggering a claim under an Owner’s Policy), are situations where there is a prior lien on the property that was missed when the title company searched the title. If the missed lien affects the priority of the purchase money mortgage, and if the lienholder of that prior lien attempts to enforce or foreclose that prior lien, the title company will step in and defend the insured lender. The title company may choose to litigate the claim, or they may choose to simply pay off the prior lien in order to protect the priority of the lien insured under the Loan Policy. Either way, while the title company is defending the lender, it is also protecting the homeowner from being dispossessed by a foreclosure of the prior lien. For the most part, though, the Owner is a bystander in this drama, and so long as the title company deals with the threat of the prior lien, the insured under the Owner’s Policy has suffered no loss to trigger a claim under the Owner’s Policy.
So, as you can see, the interests insured by the two policies are similar, but not identical. There is sometimes confusion when residential purchasers come to closing, and see charges for two different title policies on their closing statements, one for the Loan Policy and one for the Owner’s Policy. They will often ask why they have to pay for two title policies, and want to decline purchasing the Owner’s Policy. If the home purchaser only buys the Loan Policy as required by their lender, in the event of a claim, the title company would only defend the lender, because that’s the only policy that was issued, and the homeowner would not be covered and would have to defend their title at their own expense. The old adage about being penny wise but pound foolish would apply to that homeowner. Also, when you purchase a Loan Policy at the same time as an Owner’s Policy, you can often obtain a greatly reduced premium for the Loan Policy, usually called a “simultaneous” rate. When coming to closing, it is always wiser to purchase the Owner’s Policy and Loan Policy together using the simultaneous rate, and have the peace of mind knowing that the title company will defend your title to your property for as long as you own it.