Do Buyers Need Co-op Title Insurance in NYC?

The stock certificate states the number of co-op shares they own in the cooperative corporation that typically owns the entire building, and the proprietary lease lets them occupy their specific apartment.

As a result, co-op apartment owners are technically tenants, but also shareholders, of the co-op corporation that is the landlord of the entire apartment building.

Co-op title insurance protects buyers from any liens on the property that were missed by the co-op lien search, and also provides protection against loss and legal expenses from any claims on the buyer’s ownership interest (i.e. it guarantees that the title is transferred “free and clear”).

Furthermore, co-op leasehold insurance insures that the cooperative corporation was duly formed and actually holds title to the building and/or land.

Co-op title insurance also protects against any missed liens imposed by the co-op corporation itself, such as delinquent monthly maintenance fees or co-op special assessment charges.

This means that while a standard title insurance policy will only cover the purchase price of a property in the event of a claim against rightful ownership, there is no corresponding limit on how much a title insurance company may spend to defend the policy holder.

As a result, title insurance companies on average spend about as much money on legal defense costs as they do on actual payments on claims.

The market value rider

The market value rider is an additional endorsement that co-op apartment buyers can purchase which protects their ownership against claims or liens incurred by previous owners up to the full market value of the home.

This can be useful if the buyer expects the value of the home to increase in the future, as co-op title insurance normally only protects the buyer against the original purchase price of the home.

The market value rider is typically 10% of the cost of the title insurance premium, and is also paid only once upfront. An appraisal is done to certify the market value of the home in the case of a claim.

Co-op title insurance is rarely used in NYC

Even though title insurance is required lenders when buying a condo or a house with financing and is extremely common even for all cash buyers, it is rarely seen in co-op apartment sales.

Banks don’t require borrowers utilizing a share loan, the co-op equivalent of a mortgage, to get a co-op leasehold insurance policy, but real estate attorneys generally don’t push buyers to get them either.

However, there are a few unique situations we’ve seen where buyers do tend to get co-op title insurance.

When it’s an estate sale

An estate sale can be messy and having clear title may not be as straightforward as a regular re-sale transaction.

For example, the executor of the estate may not have clearly identified all heirs and beneficiaries.

In another common scenario, one of two siblings has taken over the sale process, but did not get written consent from the other sibling. As a result, the sale may go through without the consent of the other sibling which is a serious issue.

If the seller lost their stock and lease

In a co-op sale, the seller is typically required to hand over the original stock certificate and proprietary lease to the managing agent, who then cancels them at closing and re-issues a new stock and lease to the buyer dated as of the closing day.

However, this can be a serious issue which can cause significant delays if a seller who owns their apartment free and clear of a loan lost their stock and lease.

The managing agent may require the seller to pay for co-op title insurance to protect the building management company in case of any potential future disputes around ownership (i.e. the seller tries to sell the original stock and lease to someone else).

Contrary to what typically happens, the seller usually pays for the policy covering the managing agent’s liability. Of course, if the buyer wants co-op title insurance to cover themselves, they will have to pay for it.

When it’s a foreclosure

Risks to clear title increase for purchases of homes that previously been subject to foreclosure. This is because previous owners could claim that the co-op foreclosure process was improperly handled or otherwise illegitimate in some way.

This risk is magnified since the co-op foreclosure process is non-judicial, meaning that co-op corporations do not need to go through a court process to foreclose upon a shareholder’s stock and lease.

In New York, foreclosures are especially risky for lenders because the courts tend to be very liberal in favor of borrowers, and it’s not unheard of for foreclosure proceedings to drag on for 5 or more years.

When the buyer’s attorney is from out of town

The last situation we’ve seen where co-op title insurance is sometimes used is if the buyer has an attorney from out of town who has no idea what a co-op is.

This is not entirely surprising considering that co-ops are indeed a very NYC focused phenomenon.

In these situations, the out of town attorney may very well insist on the buyer getting a title insurance policy.