By Rosemary Liuzzo Mohamed and Carly Clinton
When purchasing real property, an attorney will almost always advise a purchaser to buy title insurance. Although it is not legally required, title insurance serves to protect the purchaser from a defect in title post closing. A defect in title arises when someone that was given prior ownership rights seeks to assert those rights against the current owner. The owner’s policy will protect the purchaser against a dispute up to the purchase price of the property.
The most common misconception is that there is only one form of title insurance available for purchase. In fact, there are different levels of coverage offered by all title companies. When sitting at a closing table, a purchaser will be asked by the title company representative if they would like to purchase additional coverage. In most cases, the purchaser’s attorney will advise the purchaser it is not needed, the waiver is quickly signed and the transaction moves on. However, it is important to know the additional coverage available to a purchaser.
In New York, purchasers have the option to buy a “market value rider,” which is the highest level of title coverage a purchaser can obtain. The market value rider will cover the fair market value of the property instead of the original purchase price. This rider is important if it is believed there will be significant appreciation during the period of ownership. The rider does not increase coverage for a rise in value resulting from renovations, capital improvements, or remodeling during the period of ownership.
The market value rider comes from Insurance law Section 6409, Subdivision C, which states, “every title insurance corporation shall offer, at or prior to title closing, an optional policy form that insures the title of owner-occupied real property used predominantly for residential purposes that consists of not more than four dwelling units for an amount equal to the market value of the property at the time a loss is discovered.”
So when does purchasing the market value rider make sense? For example, it is the year 2020 and the purchase price of your home is $1,000,000.00. Ten years later in 2030 someone with prior ownership appears and is asserting a claim of ownership for your home. Over the last ten years inflation has caused the value of your home to increase, and now the market value of your home is assessed at $1,500,000.00. If the prior owner is found to in fact have ownership, your owner’s policy from your title company would only cover the purchase price paid in 2020, and you would be out the $500,000.00 that your home would potentially sell for in 2030 if placed on the market. If you purchased a market value rider at your closing in 2020 at the time of the claim the title company would cover the market value in 2030, the full $1,500,000.00.
The market value rider cost is in the form of a one time charge paid at closing which is usually 10% of the owner’s title insurance premium. A few hundred dollars extra paid at closing for the market value rider can provide the highest level of coverage against a future claim to title.
Most people may consider the market value rider an unnecessary expense, however, it is important to be an informed purchaser during any transaction. A home may be the biggest purchase in one’s lifetime and the market value rider is something to consider for optimal coverage. Adam Leitman Bailey, P.C.’s transactional department handles hundreds of closings a year and is available to fully explain the benefits of the market value rider to our clients.