A friend stopped by my office yesterday to discuss a few title issues that we had recently discovered and during the course of our discussion, he asked a very good question — one that most of us (including me) forget to address as we go about our daily life.

His question was, “If I purchase land for $50,000 and buy title insurance at closing, what happens if I build a house on the property, is that insured as well?” Spoiler alert… unless you endorse to increase the coverage of your title insurance policy, the answer is no.

Let me share a little background on title insurance policies, as well as a horror story. There are two types of title insurance policies: owners title insurance policies and lenders title insurance policies.

The lenders policy insures the bank, so that their loan is in first lien position against the property and in the event the lender forecloses, there are no taxes, other liens, leases or any other person that has a senior claim to the property. The lenders policy insures the lender for the full loan amount and as the loan is paid down, the lenders coverage decreases in proportion with the amount owed. Once the loan is paid in full, the lenders coverage is no longer in effect.

The lenders policy insures only the lender. Let’s say you purchased a property and only insured the loan (as required by the Federal Deposit Insurance Corp.) and declined to purchase an owner’s title insurance policy. In the event there was a claim against the title to your property, the title company would have the right to pay off your loan to ensure that the lender did not experience a loss. Without an owner’s title insurance policy, you would stand to lose your down payment and the cost of any improvements you had made to the property.

An owner’s policy insures only the owner. There is a one-time premium when you purchase the property and when the policy is issued it remains in effect for the entire time you own the property. The value does not decrease like that of a lenders policy, but it does not increase automatically as you improve the property.

Many people who purchase real estate make improvements to the property, some of which can vastly increase the value of the asset.

In the event of a catastrophic failure of title, an owner’s title insurance policy will cover your financial losses, such as attorney’s fees and court costs, even if you have to move out of the house, but it will not cover additional funds that you spent improving the property.

In my experience most people who purchase and improve a property forget to go back to their title company to increase the coverage to be commensurate with the improved value. In fact, when my friend asked his question I immediately realized that I had failed to increase the title coverage on the home my husband and I just recently renovated significantly.

I did not feel alone though when I recalled that many years ago Japan Airlines acquired the property close to Gun Beach. When they purchased the property, they insured the ownership for the $10 million purchase price. A few years later they had invested close to $100 million building the lovely and unique Nikko Hotel on Tumon Bay. Like me, they forgot to increase their owners title insurance coverage to equal their investment. Years passed and JAL discontinued flights to Guam and decided to sell the Nikko Hotel. During the sale period, several claims of ownership were filed against the property and the Nikko Hotel tendered those claims to First American Title. First American Title decided that they could take on defense of the claims and were successful in court. It could have turned out very differently though, if the claims filed had resulted in total loss of title to the property. A $10 million reimbursement for their policy limits would not have gone far in protecting the loss the owners would have suffered.

I owe my friend a big thank you, for the great question and for reminding me to adequately protect the additional investment in our home. mbj

— Kim Anderson Young is the president of Security Title. She has over 30 years’ experience in the real estate and title industry. She can be reached at [email protected]