06/04/2010
Title insurance provides a guarantee to a real estate buyer or lender that, in the case of loss due to a defect or flaw in title prior to the date of the policyholder's ownership of the real property, the policyholder will be indemnified by the insurance company. However, the insured does not actually have the contractual right to the dollar amount of their loss.The title company has the option to litigate the issue in an attempt to remedy the defect or flaw in title. If it declines this option, the title insurance company is expected to indemnify the title holder pursuant to their contract.
In the event of a defect in title, the title insurance company should follow one of two courses of action: (1) to institute and without undue delay prosecute any action or proceeding, or do any other necessary act to establish title to the estate or interest as insured, or (2) to pay or otherwise settle in the name of the insured any claim insured against or to terminate all liability of the insurer by paying the amount of insurance under the policy. The insurance policy creates a contractual relationship between the insurer and the insured, in which the insurer has a good faith obligation not to unreasonably withhold payment due to the insured under the policy. However, title insurance companies do not always follow the above course in an expeditious manner. Many title companies have either denied the claim, which prompts an appeal for the insured, or initiates an investigation which goes on for months. In Missouri, the insured can pursue the remedy of "Vexatious Refusal to Pay," which entitles policyholders to bring a claim against the insurance company for refusing to follow the above-described course. In order to establish this claim, the burden of proof falls on the insured, who must show the insurer's refusal to pay the claim was willful and without a reasonable cause. If the insured succeeds in establishing vexatious delay or refusal to pay, the court or jury may award damages and attorney's fees in addition to the amount due under the contract. Unfortunately, a claim for vexatious refusal to pay does not solve a policyholders instant problem of having a cloud on the title. Moreover, oftentimes title defect issues arise with troubled loans, which prevents a lender from executing on collateral. The delay of execution and increased expenses of clearing title only compounds the costs associated with a troubled loan.