When children are young, they use fractional sized violins. Those violins are smaller than a full-size violin and come in sizes as small as the 1/32 size my son started with.

The fractional names aren’t entirely accurate. A full-size violin is approximately 23-1/2 inches long from the bottom to the end of the scroll. A half size is smaller, approximately 20-1/2 inches, but not one-half of the size. The 1/32 size violin was only about one foot long.

Because children grow and the quality of fractional size violins frequently is not high (nor would a parent want to put a $5,000 violin in the hands of a five-year-old), many parents rent them. Many violin shops offer to apply a portion of rental fees to the purchase of a violin to create customer “loyalty.”

When it was time for my son to move to a 1/8 size violin, I went to a local shop to rent a violin with that goal in mind. At the shop, I faced a myriad of choices, which were more baffling than selecting a violin for purchase.

There was the “basic” violin rental of a violin, bow, and case. I could pay more for a “premier” instrument, or I could save money by renting a “budget” instrument. Once I selected which instrument level I wanted, the store told me there were more choices.

I could buy two levels of “insurance,” which would protect me from having to pay the value of the violin were it to be broken–one which paid 60% of the cost of damage and the other which paid 100%. Plus, there were two levels of maintenance plans for a bow rehair and new strings twice per year.

The insurance made sense since I was putting the violin in the hands of a Kindergartener. Plus, it eliminated the possibility of a later dispute about whether damage was new or existed when we rented the instrument. And, the maintenance plans covered necessary maintenance at a price lower than the items would cost a la carte. However, when the monthly charges were tallied, the extra items had turned what started as a $25/month violin rental into a $65/month rental.

To real estate buyers, title insurance options may seem as confusing as the violin rental options do to parents. Title insurance policies can be standard or extended coverage. They also have both exclusions and exceptions from the basic title policy. And there are general exceptions and special exceptions. Plus, buyers can purchase endorsements to their title policies.

This article provides a basic primer on what these terms mean to commercial real estate buyers and how they can determine which options best meet their needs.

Title Policy Roadmap

Title policies consist of several sections:

• Covered Risks describes what the policy covers. This language is preprinted on the form and usually is not subject to negotiation.

• Exclusions limits the coverage. Exclusions include contracts made and defects known by the insured, governmental regulations, and liens occurring after the policy date. The exclusions also are preprinted on the form. Exclusions usually cannot be removed from the policy.

• Schedule A describes the specific coverage, including a legal description of the property, the insured’s name, and the dollar amount of coverage obtained.

• Schedule B General Exceptions are claims which aren’t covered under the insurance policy, such as rights of tenants in possession, unrecorded easements, encroachments and other boundary issues, and other items which may vary from state to state. General exceptions also will vary depending upon whether the buyer purchases “standard” or “extended” coverage, because the later removes some exceptions. Depending upon the state, a buyer may be able to negotiate removal of some or all of the general exceptions.

• Schedule B Special Exceptions are exceptions to the coverage unique to the specific property. These include easements, leases, restrictive covenants, mechanic’s liens, mortgages, and other encumbrances on the land. Because these items come from county real estate records, title companies typically will remove special exceptions only if they were erroneously included or if they are removed from the county records.

• Conditions are listed in a title commitment but not in the title policy. These include paying the purchase price, obtaining a deed, releasing the seller’s mortgage, buyer organizational documents, and other items the title company requires before it will issue the final policy. Conditions usually are non-negotiable.

• Endorsements are optional items which expand coverage to meet the buyer’s needs based upon the specific property.

Title insurance is regulated by the states, so rates will vary from state to state. In general, the cost of standard title insurance coverage is calculated by multiplying the amount coverage by an insurance rate, which is determined by the type and location of the property. In some states, the cost of title insurance is negotiable, but in many states it is not. Endorsements add to that cost, but the most common endorsements cost $100 or less.

Paying for an Owner’s Title Insurance Policy

Buyers usually have no choice but to purchase at lease some title insurance because mortgage companies require it. But those mortgagee title polices only cover the mortgage company’s rights. If a buyer wants insurance of its ownership, it needs to purchase an owner’s title policy also.

In some states sellers customarily pay for the buyer’s owner’s policy. However, buyers almost always should purchase an owner’s policy, even if it is at their own expense. Even if the mortgage company has loaned the bulk of the purchase price, the buyer still will want to protect its ownership and its down payment.

When a mortgagee’s policy is issued, the additional cost for an owner’s policy usually is negligible. Most buyers choose to buy insurance equal to their purchase price.

Buyers should pay particular attention to the special exceptions. If a special exception item doesn’t apply to the property or can be removed from the county records, the title company will not charge to remove them from the policy.

Buyers should negotiate their real estate contract so it is the seller’s responsibility to remove its mortgage, mechanic’s liens, tax liens (except in states where taxes become a lien before they are due and payable), and other financial liens. The real estate purchase contract also should include a process for the buyer to request that the seller remove other exceptions to coverage.

Sometimes, the buyer can negotiate for the seller to pay for the standard endorsements. However, usually, the buyer will pay for any title endorsements.

So Many Endorsements

The number of endorsements varies from state to state and in some states can number as many as 100. Many endorsements, such as condominium, PUD (planned use development), and subdivision endorsements are applicable only for specific property types.

Other endorsements may apply only to certain ownership situations. For instance, a leasehold endorsement is used when the “owner” only leases the real estate, and a non-imputation endorsement may be used when ownership of real estate is transferred indirectly via transfer of equity in the entity that owns the property.

Which Endorsements to Choose

Besides purchasing endorsements for unique property types and ownership structures, Buyers should select endorsements based upon the unique needs of the real estate. For example, a utility access endorsement will provide coverage the real estate owner has issues gaining access to public utilities via easements over adjacent properties.

Some endorsements which buyers commonly select include:

• Zoning–this endorsement insures against losses should the buildings not comply with current zoning. Zoning endorsements will cover issues with building setback lines, building height, and off-street parking requirements. The title company will require a survey and may require a zoning report or zoning letters from the government before it will issue this endorsement.

• Covenants, Conditions and Restrictions–insures against losses due to violation of certain covenants not listed in the Schedule B special exceptions.

• Access and Entry–protects the owner from later claims by the government that curb cuts or sidewalk access to the road are unlawful. A similar “indirect access and entry” endorsement is available where the property depends upon easements over adjacent land for access to the public road.

• Same as Survey–insures that the legal description on the title policy is the same as on a specific, certified survey. The title company will require an ALTA survey before it will issue this endorsement.

• Encroachments–Boundaries and Easements--covers losses due to encroachments of buildings onto neighboring properties. It also covers encroachments by neighboring properties onto the buyer’s property.

When in doubt, buyers should take their cue from their mortgage lender. If the mortgage lender requires an endorsement, buyers should obtain any equivalent owner’s endorsement. Mortgage lenders may sometimes go overboard, but the cost of owner’s coverage usually is minimal when a mortgagee’s policy is purchased. Plus, it doesn’t make sense for the buyer to insure the lender with better cover than it obtains for itself.

Working with the Seller and Title Company

Unlike a parent renting an instrument for a young music student, real estate buyers need not decide about title insurance options by themselves. Buyers’ real estate attorneys can help with the process. Title insurance underwriters also can be a resource in explaining endorsements.

As a first step, Buyers’ attorneys usually include a process for buyer to make title objections in the real estate purchase contract as a starting point. But an attorney isn’t able to adequately review title without both a title commitment and a current survey that shows the special exceptions and building and easement locations. The buyer’s attorney also needs to review the documents listed in the special exceptions.

After reviewing the title commitment, survey, and supporting documents, the buyer’s attorney then will work with the seller’s attorney and the title company to get as many special exceptions removed as possible. The buyer’s attorney also can help the buyer to obtain a survey, zoning report or letter, and other documents necessary to obtain title endorsements.

After dealing with the confusing options for violin rental and see the total “real” cost of renting a cheap violin, I decided it was less expensive in the long run to buy a fractional size violin. However, real estate buyers shouldn’t forego title insurance just because the options are confusing. Instead, they should work with their attorney and the title insurance company to purchase the title insurance that best meets their needs.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.