Is title insurance legal in Costa Rica?
An Instituto Nacional de Seguros ruling Sept. 29 says that title insurance was not legal in this country, but that now it is and has been since July 1997. However, insurance officials say the legality could change in the future.
The decree from the legal department of the insurance monopoly explains title insurance is not insurance, but a guarantee or a bond. This finding is a flip-flop of the insurance monopoly's last ruling in 1976 that said title insurance is an insurance and that no company in Costa Rica can sell it except for the monopoly known as INS.
The national insurance company became a monopoly with law No. 12 of Oct. 30, 1924. Only INS can sell insurance.
INS further stated that title insurance is an Anglo-Saxon creation and is not necessary in Latin America or Costa Rica because Roman law governs Latin countries. According to INS, the Registro Nacional and licensed public notaries make property transactions safer than in the Anglo world like the United States.
In 1997, a representative of a Stewart Title Guarantee Co. asked INS for a new analysis because the company wanted to sell a product called “Guaranty of title for land located in the territory of the Republic of Costa Rica.”
The legal department of INS ruled in a decree dated July 30, 1997, that a title guarantee is not regulated by the monopoly.
The legal opinion said Article One of the Law of Fidelity Insurance of 1931 precludes fidelity guarantees, also referred to as fidelity insurance, from the insurance monopoly.
In other words, warranties and guarantees of all types are insurance, but excluded by definition from the domain of the national insurance monopoly.
The fine print goes on to explain that a title guarantee is really a bond of fulfillment and not an indemnification.
Most people in Costa Rica believe title insurance is an indemnification. This is incorrect because indemnifications cover unknown futures losses where title insurance is to cover something from the past.
The cornerstone of title insurance in the United States is the chain-of-title. Chain-of-title means the history of all the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
Different variations of title insurance exist around the world. However, it is principally a product developed and sold in the United States. Title insurance protects an owner or a lender against a financial loss in real property due to title defects and other issues.
Title insurance gets a bad rap in the United States because creditors require it to protect lending interests and forced borrowers to purchase it even if they do not want it. Many believe it is overpriced.
Legal regulators criticize the market because it is full of commission schemes and kickbacks. The industry mimics other business structures, paying high commission to brokers and resellers. Affiliated business arrangements attempt to legitimize kickbacks or commissions to brokers, real estate agencies and attorneys.
Affiliated business arrangements exist in Costa Rica too, and that is why almost everyone is hit with the “buy title insurance” spiel when purchasing property here.
In Costa Rica, title insurance is not necessarily insurance over the title of a property, but legal insurance to help pay the legal bills to protect the title of a property.
In theory, title insurance according to the INS ruling guarantees one's right under Article 1038 of the country’s civil code. Many factors can limit a payoff. Knowing the “what is not covered” is more important than knowing “what is covered” with any policy.
Is it worth it? Title insurance is full of hype, and it is not the same kind of policy as most North Americans purchase in the United States. Read the fine print and understand what the warranty truly guarantees in Costa Rica. Good homework and due diligence can save buyers the additional expense.
Article first published in A.M. Costa Rica on November 27, 2006.
