A Sharper Image

The words “primary” and “secondary” are probably commonplace if you build booster rockets for the Saturn 5. They may also be common if you assign beneficiaries in a life insurance policy. The words are also important in title insurance.

At Old South Land Title, and in my law office, we decide about once a week whether a title policy is to be primary or secondary. That is a several-thousand-dollar decision which we sometimes make without a great deal of help from the contract.

Here’s an example which shows why the distinction is important. We are asked to close a home which costs $200,000. For simplicity of the discussion, the buyer will put a mortgage on the house in the amount of $200,000. Everyone knows that title insurance is issued at “promulgated rate”. That means that the rate is established by the Department of Insurance, and that the rate is a standard rate applicable to all policies in Florida. What everyone may not know is that there are two kinds of title insurance policies, an owner policy, and a mortgagee policy. In this case, the mortgagee must, generally by law, be protected in the full amount of the mortgage. The owner will want to be protected in the same amount. The promulgated rate for the issuance of a $200,000 policy, whether owner or mortgagee, is $1075. However, when either policy is issued, if the other is requested, it must be issued for a minimum cost, normally $25. The theory of the small supplemental charge is that there is no additional exposure to the underwriter since the underwriter is already obligated for $200,000 if there were a loss in title. Those of you who follow this article know that the theory is only partially correct, and that every owner in the above example should have not only mortgagee coverage, but owner coverage as well. Don’t let your client walk away from a closing table without paying the small fee required for the issuance of an owner policy, if a mortgagee policy has been issued.

The issue we confront in closing is, what happens when the contract requires a seller to pay owner title insurance for the purchaser, and requires the purchaser to pay his own financing expenses, but doesn’t say which is the “primary” or “first” policy? A part of the Purchaser’s financing expenses is the title policy the mortgagee will require. If the owner policy is the primary policy, the seller will pay $1075. If the mortgagee policy is the primary policy the seller will pay $25.

A closing agent will always be guided by the intent of the parties as reflected in the contract. If the parties have negotiated for one of them to pay title insurance and simply neglected to specify the other policy, such as the example above, I make the assumption that the parties would not have negotiated a $25 item and left undiscussed and un-negotiated a $1200 item. Therefore, since the seller undertook in the contract to provide the purchaser with a title policy, I interpret that to mean the primary policy.

The better rule and the message of this article is to urge every careful real estate professional is to clearly state in their contract the intent of the parties. The parties should negotiate and decide this significant financial issue and state it in the contract. To do otherwise, leaves the closing agent to guess what the parties intended.