Insurability vs. Marketability: How is a property’s insurability different from its marketability?

The terms “marketable” title and “insurable” title are very common real estate terms that come up in every contract for sale of real property. They are frequently used but commonly misunderstood. First, “marketable” title is generally defined as title that is free from encumbrances or defects that would legally or physically restrict the property owner’s use of the property. Some examples would be: outstanding mortgages/liens; restrictive covenants; easements on the property; zoning restriction violations; and building setbacks. In addition, “marketable” title is free from any reasonable doubt as to its validity. Some examples would be variations in the chain of title; variations in the names of the grantors and grantees; outstanding heir issues after an estate conveyed title; and unrecorded leases. 

So what happens when unmarketable title presents itself? It is at this stage that you turn to a reputable title insurance company. “Insurable” title is title that a reasonably prudent title insurance company is willing to insure at normal market rates. Here, the title does have a known defect or defects in the chain in title.  The determination to insure a property may differ between title insurance companies. Their decision to insure title is made after marketability issues have either been resolved or it has been determined that these issues present a low risk of turning into claims in the future. It is important to note that there are some marketability issues that title companies cannot insure over and these issues, such as easements and building setback lines, are commonly excepted from the title policy.

It is fair to say that unmarketable title presents itself quite often and there exists some form of defect or encumbrance on virtually every property that is sold. It is important to obtain as much information from the seller beforehand as possible, information such as copies of prior title insurance policies or copies of existing surveys. Such documentation and information is helpful and assists in addressing any potential issues early on. Understanding the difference between “marketable” and “insurable” can help facilitate a smooth transaction.