A Quitclaim Deed is a special kind of deed. Unlike a Warranty Deed or Grant Deed, it transfers title without warranty. With a Quitclaim, the grantor is saying, "I'm giving you what I have, if anything, but I am making no promises". What the grantor has is what the grantee gets. The grantee has no claim against the grantor if title is defective or even if the grantor does not own the property.
There are many circumstances where this is a useful and appropriate device. For example, the parties may know that title is questionable, and the buyer of the property may be willing to take the risk of defective title. There may be an apparent defect in the chain of title, which could create the possibility that a third party may have an interest in the property. By quitclaiming any interest he may have, the third party can cooperate in clearing the title without creating any liability for himself.
On the other hand, there are also situations in which a Quitclaim is misused. A common example occurs in which the conveyance is between related parties. A parent might want to convey property to a child as a gift, a sole stockholder might want to convey title to his corporation, or a partnership might want to split title among the partners. In such cases, it is not uncommon for the conveyance to be by Quitclaim because the grantor does not want to assume any risk that a title defect might later surface. This makes sense and is understandable. Such transactions are usually handled outside of escrow and without purchasing new title insurance.
What the parties often fail to consider is that the use of the Quitclaim leaves the parties without title insurance. If they had use a Warranty Deed instead of a Quitclaim deed, title insurance would still be effective without any additional cost.
Here's why: Title insurance covers the insured named in the policy, normally the original buyer. It also insures anyone who takes title through the person by operation of law--for example, by inheritance. It does not cover those who purchase from the named insured, or who receive title by gift, in trade, or as a corporate or partnership distribution. However, the policy does continue to insure the named insured against claims arising from covenants of title given when the property is conveyed to a third party. This means that when title is conveyed by Warranty Deed, the grantee can assert any claim he might have for defective title against the grantor, who can then obtain indemnification from the title insurance company. The net result is that the title insurance policy provides the money to insure against the title defect in the hands of the new owner without the payment of any additional premium. There is one potential risk, however. If the property has risen in value between the time of the original policy and the time of the conveyance, the claim under the Warranty Deed may be greater that the amount of the policy, leaving the grantor exposed to this portion of the claim. If the parties remain friendly, this should not be a problem because the claimant can simply waive his claim to the extent it exceeds the policy limit. If there is a question in this regard, another solution is to limit the warranty in the Deed to the dollar amount of the policy at the time the conveyance is made.
A Quitclaim deed is useful, but is not always the best choice when the conveyance is between related parties. If you are considering giving or accepting a Quitclaim deed, particularly between related parties, think through the title insurance ramifications to insure that you do not inadvertently divest yourself of protection which could be available without cost.