Suing Your Title Insurance Company in Pennsylvania for Missed Liens and Unrecorded Encumbrances

Closing on a new home is supposed to be the end of a stressful journey. You pay your closing costs, which include a hefty premium for an owner's title insurance policy, and you expect peace of mind. But what happens when, months or years later, you receive a letter stating that an unpaid contractor or a previous owner's creditor has a lien on your house? Suddenly, your property is at risk of foreclosure for a debt you never created.

In Pennsylvania, title insurance is highly regulated to protect consumers. If your title insurer failed to uncover an existing encumbrance during their pre-closing search, they are generally on the hook to fix it. However, insurance companies are businesses; they frequently deny claims by pointing to confusing fine print. If your title company refuses to clear a missed lien, you may need to file a lawsuit to enforce your rights. We recommend searching our US Lawyer Directory to find a local Pennsylvania real estate litigator to fight back.

Common Missed Liens and Unrecorded Encumbrances in PA

Title searchers are human, and county records are not always perfectly organized. Homeowners in Lancaster, Erie, and Philadelphia frequently encounter specific types of hidden debts that slip through the cracks before closing.

Unpaid Contractor Judgments (Mechanics' Liens)

If the person who sold you the house recently remodeled the kitchen but failed to pay the plumber or the lumber yard, that contractor has the right to file a lien against the house itself. Under the Mechanics' Lien Law of 1963, 49 P.S. § 1101, contractors in Pennsylvania have a specific window of time to file these claims. Because of this delay, a mechanics' lien might be perfectly valid but not show up in the public records until after you have closed on the property.

Undisclosed Municipal Liens

Municipalities do not forgive debts just because a property changes hands. If the previous owner racked up thousands of dollars in unpaid water bills, sewer assessments, or local trash collection fees, the city can place a municipal lien on the property. These liens are notoriously difficult to track down because they are often kept in separate municipal authority databases rather than the main county courthouse.

Hidden Second Mortgages or HELOCs

Sometimes, a previous owner takes out a Home Equity Line of Credit (HELOC). During closing, the primary mortgage gets paid off, but the closing agent mistakenly forgets to order the payoff for the HELOC. The second bank still has a valid mortgage on your home, and they can threaten to foreclose if the debt isn't settled.

The Process: Suing Your Title Insurance Company in Pennsylvania

Title insurers are governed by the Title Insurance Companies Act, 40 P.S. § 910-1. They have a legal obligation to indemnify (reimburse) you for covered losses and a duty to defend your title in court. A notable Pennsylvania case, Rood v. Commonwealth Land Title Insurance Co., 936 A.2d 488 (PA Superior Court 2007), illustrates how courts interpret the strict duties owed by title insurers to property owners. Here is how you take action.

Step 1: Drafting a Formal Demand Letter

Before filing a lawsuit, you must formally notify the insurer of the defect. Your attorney will draft a demand letter outlining the hidden lien, attaching proof of the debt, and officially requesting that the insurer either pay the creditor to remove the lien or hire an attorney to fight the creditor in court. The insurer usually has 30 days to investigate the claim.

Step 2: Forcing the Insurer's Duty to Defend

If a third party files a lawsuit trying to foreclose on the hidden lien, your title policy includes a "Duty to Defend." This means the title insurance company must hire and pay for a lawyer to defend you in the Court of Common Pleas of Erie County, Erie (or wherever the property is located). If the insurer refuses to provide a lawyer, they are in breach of contract.

Step 3: What to Do if the Claim is Denied Under Schedule B Exceptions

Title policies contain a section called "Schedule B," which lists specific items the policy does not cover (like standard utility easements). Insurers frequently try to dodge payouts by claiming the missed lien falls under a vague Schedule B exception. If they wrongly deny your claim, your attorney can file a civil lawsuit against the insurer for Breach of Contract. Furthermore, if the denial was unreasonable and malicious, you can sue them for Bad Faith under 42 Pa.C.S. § 8371, which can result in the insurer paying punitive damages and your attorney fees.

Escalate to the Pennsylvania Insurance Department

If your title company is acting in bad faith, your lawyer may also recommend filing a formal complaint with the Pennsylvania Insurance Department, Harrisburg. While the state agency cannot force the company to pay a specific claim, regulatory pressure often causes insurers to reconsider bogus denials.

Frequently Asked Questions (FAQ)