Encumbrance

Encumbrance is any claim that is attached on the title of a property which affects, restricts or limits the title specifically inhibiting any transfer or renders any actions towards the property ineffective until it is resolved. Examples of encumbrances are liens on real estate, mortgages, leases, unpaid proper taxes and easements.

Encumbrance in Insurance
Encumbrance, in terms of insurance is anything that limits, impedes or affects an insurance policy including its provisions. These are previous claims which restrict the use of the funds for other purposes because the same funds are already reserved to satisfy the claims.

In purchasing a real estate property, many people opt to buy title insurance because it assures or certifies that the property has a marketable title. This means that the title is free from any encumbrances that can make the title defective, defeasible and unmarketable. The rule is that if the owner of the title insurance suffers any loss resulting from the defect of the title, the insurance company will indemnify the owner. This means the owner will be provided with a proper amount to restore his or her former financial condition prior to the transaction and the loss. Mechanics lien on the property is one common example of an encumbrance attached to a title. Mechanic’s lien is the system used by workers to guarantee payment from the property owners for the services rendered and materials used in improving the property. In this type of encumbrance, the worker may resort to a court proceeding forcing the sale of the property for the unpaid services and materials.

However, there are several defenses that can be used by the title insurance companies in case they are sued based on the damages caused by the encumbrance. Such defenses includes that the title was not defective, the “notice of claim and proof of loss” was not complied with by the owner of the title insurance policy , a proof of payment for all the appropriate benefits made by the title insurance company and that the encumbrance or unmarketable title is exempted from coverage.

Encumbrances which are exempt from coverage
There are cases when an encumbered title is not covered by a title insurance policy. This necessary means that the owner of the title insurance policy is not entitled to collect benefits or to be indemnified by the title insurance company in case of any damage or loss. Mineral or water rights are examples of particular encumbrances that are not unequivocally stated in the title insurance coverage. A “wild deed” is also an example of unmarketable title that could have been discovered if searched in the public records. And any other encumbrances attached in the title which can be discovered by an accurate survey.

In order to measure the extent of title insurance benefits which can be recovered, the amount is limited to the difference in value between the property with an unmarketable title and of the one without an encumbrance. However, the difference can be substantial regardless of the extent of defect existing in the encumbered title.