Many times a closing will involve the purchase of an unimproved lot in anticipation of constructing a home on the lot, or in some situations, construction financing will occur simultaneously with the purchase of a lot. The title agent may be asked to issue a simultaneous owner’s and loan policy. It is usually requested that the owner’s policy be issued in the amount of the lot purchase price and the lender’s policy in the amount of the construction loan, resulting in an owner’s policy with an effective amount less than that of the loan policy.
It is preferable in this situation to advise the lot purchaser to acquire title insurance coverage not only in an amount adequate to cover the value of the unimproved lot, but also to cover the value of the anticipated improvements. Without this full coverage, the insured could potentially suffer a title loss in excess of coverage amount.
When asked to issue an owner’s policy in the amount of the purchase price paid for the land and existing improvements plus the cost of construction of pending improvements, a Contemplated Improvements Clause must be inserted in the owner’s policy which limits the initial liability of the insurer to the amount actually paid for the land and existing improvements, with an increase in liability as the pending improvements are constructed and paid for, up to the maximum amount stated in the policy. The premium charged will be based on the total amount of the policy – i.e., the amount paid for the land and existing improvements plus the total anticipated cost of all improvements.