Gap Endorsement Title Insurance
Someone Else’s Agent
As real estate agents represent the seller, if it is the case that the seller is providing title insurance for the benefit of the buyer, this agent will suggest a title insurer to handle the closing and issue the lenders and owners title insurance policies.
Unfortunately this is not the most favorable position for the new purchaser and it suggested that the purchaser choose their own title insurer.
When finance is provided for the purchase, the lender will almost without fail, require a ‘gap’ endorsement on the owner’s policy. This is a commitment by the insurer to indeed provide title insurance to the buyer on settlement of the property transaction regardless of any defects to the title.
The contract for sale should stipulate this title insurance gap endorsement to be provided by the seller, as when drafted, settlement has yet to take place, and since title insurance is only available when a person has an interest in property, the risk to the buyer is that interests are created in favor of other individuals within the period prior to settlement.
Covering the Gap
Without this title insurance gap coverage the risk is often the case that mechanics liens arise from tradesmen or others not being paid in full for services they have rendered. This may not be a deliberate act of the vendor, and may simply be due to a dispute between those parties, however, as an issue of law, the new owner of property the buyer is then responsible for satisfying the debt and thereby releasing the mechanics lien.
The fact that in many owners title insurance policies there exists an exception to such interests as mechanics liens, makes this is a matter worth addressing in anticipation.
Essentially, the title insurer by providing this gap coverage is warranting that they will provide title insurance to the new purchaser regardless of the liens existing at the time of settlement. Usually they will require statutory evidence to support their commitment, and often will focus this in the vendor.
It is important to realize the role of the lender in regard to gap endorsements. The lender is acquiring an interest in the property as the property is used as security for the finance provided. Therefore the lender has a need to ensure their client receives good title to the property, but it does have title insurance of their own.
When the buyers title insurance is not of comparable quality to that of the lenders, in that a gap endorsement is applied, problems may arise and the lender while retaining the security of the property as collateral for the loan, will be most certain to leave the responsibility of less material financial obligations such as mechanics liens for services rendered, to the new owner of the property, much to their chagrin.
Routinely, title insurers will require that documentary evidence of settlement be provided within 48 hours of settlement, the absence of which could lead to the gap coverage being withdrawn.
While the title insurer providing the gap coverage will require undertakings on behalf of the vendor, the duty of disclosure is maintained upon the purchaser as in the title insurance policy. Any knowledge that is acquired by the purchaser prior settlement in regard to any matter affecting title to the property, if not disclosed in a timely fashion may inevitably lead to the vitiation of the gap endorsement and any title insurance being offered being withdrawn.