Insurable Title and Marketable Title

Every few months I get a call from a realtor or a client asking me to explain the difference between “marketable title” and “insurable title.”  Usually, this comes up in connection with some particular title issue that has either been disclosed by the seller or that our office has found during our title search. 

“Marketable title” is the gold standard in title quality.   My colleague Claire Manning, dirt lawyer extraordinaire and author of the Handbook for South Carolina Dirt Lawyers, describes marketable title as title which would pass without objection by the most conservative lawyer.  In my mind, being from Michigan, I think of marketable title as being pure as the driven snow.  (If you’ve ever had to deal with snow in your life, you know what I mean.  If not, well, you’re lucky.)  In short, marketable title is close to perfect.  One more thing: when we use the term “marketable” or “marketability” we are not referring to whether the property can be sold.  There is no prohibition against selling property with title problems, and on rare occasions, a buyer decides to purchase property with very serious title defects.  Marketable in this context solely relates to title quality.

“Insurable title,” on the other hand, is a description meaning that the title may have problems, but not such troublesome ones that they would prevent the issuance of a title policy on the property.  In short, it’s not close to perfect, but it’s not riddled with horrible problems, either.  The most conservative lawyer you know-and maybe some not-so-conservative lawyers too-would not view the title as marketable.  However, insurable title, even if not marketable, is of good enough quality for a title insurance company to insure.  The title insurance company will note the particular issue in the “exceptions section” of the policy but still give “affirmative coverage” over the title defect. 

Some examples may be helpful.  A tax sale in the chain of title, depending on how long ago the sale occurred, could render the title unmarketable, uninsurable, or both.  For example, if the tax sale occurred within the last five years, the title will certainly be both unmarketable and also uninsurable.  That’s because if the tax sale was not done properly-and many aren’t-the property owner who lost the property for unpaid taxes may be able to successfully set aside the sale.  Bottom line: no title insurance company will insure over a recent tax sale and no competent lawyer would conclude the title was marketable or even insurable.

However, if we change the facts a bit, the results change.  Let’s say the tax sale occurred 28 years ago.  Our “most conservative lawyer” would still say that the title is not marketable.  Despite being unmarketable, though, many title insurance companies would insure over the title defect. 

Why?  Title insurance, just like property and casualty insurance, is about managing risk.  No insurance company wants to “buy a claim,” but insurance companies stay in business by collecting premiums.  Therefore, if the risk is small enough, the title insurance company will, in essence, bet that there will be no claim made and insure over the defect.  Insuring a title with a 28-year-old tax sale would almost certainly be a safe bet.

Let’s change the facts again.  What if the tax sale occurred 48 years ago?  Would the title still be unmarketable?  No.  South Carolina, like most states, has a 40-year marketable title act.  This means that defects in title more than 40 years old are not defects which render the title unmarketable.  So the title in this example would be marketable and, of course, insurable.

Other title defects that might render a title unmarketable include judgments, unsatisfied mortgages, and various liens.  Depending on the facts, these title defects might also render the title uninsurable.

In other areas of the country, marketable title has been redefined as insurable title.  In other words, if the title insurance company will insure it, it’s deemed marketable.  In our example, a tax sale from 28 years ago could not be used by the buyer to terminate the contract due to title not being marketable.  The contract redefines marketability.

In the Charleston, South Carolina area, however, marketability tends to be the standard.  Our Charleston (CTAR) “form contract,” left unmodified, requires marketability in order for the contract to be binding on the purchaser.   Still, understanding the difference between marketability and insurability is important, and giving the buyer the option of accepting insurable title may be a way to save a transaction. 

–Russ DeMott