Title Insurance

Title insurance insures against defects in title to real property. It is meant to protect an owner’s or lender’s financial interest in property against loss due to title defects, liens or other matter of public record. It will defend against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate.

Comparison with other insurance

Title insurance differs in several respects from other types of insurance. Where most insurance is a contract in which the insurer indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. If liens or encumbrances are found, the insurer may take steps to fix them (for example, by obtaining a release of an old mortgage or deed of trust that has been paid off) before issuing the title policy or may list those items as specific “exceptions” from coverage.

Types of policies

Standardized forms of title insurance exist for owners, for lenders, and for construction loans.

Owner’s policy

The owner’s policy insures a purchaser that the title to the property is free from defects (liens and encumbrances), except those which are listed as exceptions in the policy. It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party or if the property is “unmarketable.”) For example, if an interest in the property is found to belong to someone else, if there is no access to the land, or if there is some other defect on the title. The policy also contains various standard exclusions to coverage and also specific exceptions to coverage, based on documents that have been recorded against the property at some point in the past, that the title company is unwilling to insure.

The policy limits of the owner’s policy is typically the purchase price paid for the property. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state or county which is reflected in most local real estate contracts. Consumers should inquire about the cost of title insurance as soon as possible. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender’s policy

The lender’s policy is separate from the owner’s policy. The lender’s policy protects the lender for the amount of money lent against the property. Coverage under the lender’s policy lasts as long as the loan secured by the mortgage or deed of trust has a balance. The title insurer’s risk under a lender’s policy is generally less than that of an owner’s policy; as a result, insurers typically charge lower premiums for a lender’s policy than what would be charged for the same dollar amount of coverage on an owner’s policy.

Construction loan policy

In many states, separate policies exist for construction loans.

Land title associations

In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy “jackets” (standard terms and conditions) for owner’s, lender’s and construction loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA doesn’t issue title insurance; they provide the policy forms that title insurers issue.

Title insurance, especially owner’s title insurance, is extremely important when purchasing a house or piece of property. Yet many consumers are unsure about what title insurance is and what it protects against. Here are some answers to the more common questions about title insurance.

• How am I protected?
• I’m refinancing. Why do I need new title insurance?
• I’m buying a newly built home. Do I need title insurance?

How Am I Protected?

In order to issue title insurance, the title company must search public land records for matters affecting that title. Many search the “chain” of title back 50 years. Twenty-five percent of title searches find a title problem that is fixed before the insurance is issued. Some examples of items that can cause a problem are: deeds, wills and trusts that contain improper information, outstanding judgments or tax liens against the property, and easements. Title companies fix the problems then issue the title insurance.

Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claiming to own the property, or forged deeds could cloud the title. Owner’s title insurance offers financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title.

I’m Refinancing. Why Do I Need New Title Insurance?

When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will require lender’s title insurance to protect their investment in the property. You will not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property. You may end up getting the existing title policy “re-issued,” in which you case you would pay a much lower reissue rate.

Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid, or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.

If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.

I’m buying a newly built home. Do I need title insurance?

Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure that the property has clear title and that they are insuring the correct property. Purchasing owner’s title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.