CHCP Insurance & Liability Considerations 4 — Questions and Answers
Question 1: What is the legal doctrine of 'caveat emptor' and how has it been modified in modern real estate transactions?
- 'Let the buyer beware' — still fully applicable with no seller disclosure requirements
- 'Let the seller beware' — sellers bear full liability for all property conditions
- 'Let the buyer beware' — largely replaced by mandatory seller disclosure laws (Correct answer)
- 'Let both parties beware' — equal liability shared between buyer and seller
Correct answer: 'Let the buyer beware' — largely replaced by mandatory seller disclosure laws
Caveat emptor traditionally placed the burden on buyers, but most states now require sellers to disclose known material defects, significantly limiting this doctrine.
Question 2: A property in a Special Flood Hazard Area (SFHA) is being sold. The seller failed to disclose this fact. Who bears liability?
- Only the buyer's real estate agent
- The seller, and potentially the seller's agent for failing to disclose a material fact (Correct answer)
- The title company for not catching it during the title search
- The lender for not ordering a flood certification
Correct answer: The seller, and potentially the seller's agent for failing to disclose a material fact
Flood zone status is a material fact requiring disclosure; both the seller and the seller's agent may face liability for non-disclosure.
Question 3: What is 'force-placed insurance' and when does a lender use it?
- Insurance the seller must purchase before listing the property
- Insurance a lender purchases on a borrower's behalf when the borrower fails to maintain required coverage (Correct answer)
- Insurance required by the state for all properties in hurricane zones
- A type of title insurance added after closing at the buyer's request
Correct answer: Insurance a lender purchases on a borrower's behalf when the borrower fails to maintain required coverage
Force-placed (lender-placed) insurance is purchased by the lender to protect its collateral when the borrower's insurance lapses or is insufficient, typically at higher cost to the borrower.
Question 4: A title search reveals an old, unsatisfied judgment lien against the seller from 10 years ago. What should happen before closing?
- The lien can be ignored if it is more than 7 years old
- The lien must be paid off or released before or at closing to convey clear title (Correct answer)
- The buyer should accept the property subject to the lien and renegotiate the price
- The title company must automatically remove the lien from public records
Correct answer: The lien must be paid off or released before or at closing to convey clear title
Judgment liens attach to real property and must be satisfied or properly released before the seller can convey marketable title to the buyer.
Question 5: Which endorsement added to an owner's title policy would protect against a zoning law violation existing at the date of policy?
- ALTA 3 Zoning endorsement (Correct answer)
- ALTA 9 Restrictions, Encroachments, Minerals endorsement
- ALTA 4 Condominium endorsement
- ALTA 22 Location endorsement
Correct answer: ALTA 3 Zoning endorsement
The ALTA 3 Zoning endorsement specifically provides coverage against loss from zoning ordinance violations that affect the insured property.
Question 6: What is 'indemnification' in the context of real estate closing liability?
- The process of insuring a property against physical damage
- An agreement by one party to hold another harmless from specified losses or liabilities (Correct answer)
- The lender's right to foreclose upon default
- The title company's refusal to insure a property
Correct answer: An agreement by one party to hold another harmless from specified losses or liabilities
An indemnification clause requires one party to compensate another for losses arising from a specific event or condition, shifting financial risk between the parties.
Question 7: A newly constructed home sold at closing is found to have a latent defect (hidden foundation crack) two years later. Which legal theory may hold the builder liable?
- Statute of frauds
- Implied warranty of habitability / implied warranty of workmanlike construction (Correct answer)
- Doctrine of merger
- Parol evidence rule
Correct answer: Implied warranty of habitability / implied warranty of workmanlike construction
Builders are typically held to an implied warranty that new construction is habitable and built in a workmanlike manner, covering latent defects for a statutory period.
CHCP Insurance & Liability Considerations 4
What is the legal doctrine of 'caveat emptor' and how has it been modified in modern real estate transactions?