A bond by definition is a security representing debt, whereby the holder is entitled to the principal and interest payable by the issuer at a predetermined date in the future. Often an income stream of regular payments is provided but in the case of title insurance it is usually only ever as short term proposition and so the principal and interest is satisfied in full.

Before an insurer will provide such coverage as gap title insurance the vendor of the property will be required to provide a surety bond as collateral to insure against such contingencies as mechanics liens.

At this time statutory evidence will also be adduced to protect the insurer against the risk of title defects being incurred in the period between the insurance of gap cover and the settlement of the property transaction. It will usually be the case that the contract for sale provides for the vendor complying with all necessary to provide this gap coverage and so invariably a bond of this sort will be provided the insurer.

This necessarily involves the payment of the bond by a financial institution if there be any shortfall in the value of the bond and the value of any liens that do indeed represent defects in title on a property. Ordinarily it may be assumed that the insurer has the rights of subrogation in regard to this deficit.

Right of Subrogation

However, the law of title insurance provides that once the bond is paid off however, that the insurer has no right of subrogation in regard to the mechanics lien on the property and so the insurer will naturally seek to reflect this limitation of its rights in the consideration furnished by the vendor.

Considering the risk taken by the insurer in providing cover without any substantial collateral, it appears reasonable that a premium be charge the vendor for the provision of gap coverage in particular.

In any event the insurer will have to provide clear title to the subsequent purchaser of the property or compensation in lieu.

If the case exists that a vendor has incurred interests upon the property such as mechanics liens for the provision of services left unpaid, the vendor is faced with the predicament of losing whatever good standing was apparent at the financial institution that actually provided the bond, and also the title insurer.

Given the relatively short period of time encompassing gap coverage and the period between the exchange of contracts for sale and settlement, this would appear to be reprehensible conduct by the vendor.

It s for these vet types of contingency that title insurance exists in such wide spread proportions. Without it the private rights of an individual would stand to be undermined by the often questionable and unscrupulous ethics of some members of the community.

This is a point worth recalling particularly when allegations that the title insurance industry is able to experience unjustifiable profits at the expense of the consumer.

Considering the wanting system of title registration in existence in the United States, it appears that in reality, the title insurance industry has been paying the role of a fictional privatization of what is usually the domain of governmental authorities – that of ensuring the integrity of property title transfers.

Resources:

http://www.jwsuretybonds.com/surety-bonds/commercial-bonds/title_agency_bond.htm

http://motor.etax.dor.ga.gov/motor/titles/titlebond.asp

http://www.wolfewyman.com/firm_articles/article7.pdf