I saw this in a Realtors Q&A and thought it might be of interest…
Question: Several years ago, my brother and I bought a foreclosed house from the bank. He and I split the money, but only my name went on the deed. We downloaded a form off the Internet, creating a limited liability company and quit-claim deeding the property to our company. We just found out that the bank missed a lien during the foreclosure. We made a claim against our title insurance policy that was denied. What gives? – Charles
Answer: A title insurance policy is bought at closing to cover exactly this type of problem: an unknown defect or challenge to your ownership of the house.
But title insurance is a contract with the insurer, just like any other insurance policy. There are rules that have to be followed and exceptions to the coverage. Your problem is caused not only by the fact that you transferred ownership of the property to a separate legal entity, but also by the type of deed that you used to do it.
A quit claim deed only transfers ownership and provides no promises that the ownership is good – or even that your seller will help fix any problems that come up. You should have instead used a warranty deed, which contains these promises.
It may be tempting to save a few bucks by handling these matters yourself, but even a seemingly innocent mistake can cause you big trouble later.