What is Title Insurance?
What kind of problems?
What does title insurance cover?
Who is covered by title insurance?
Why do you need title insurance?
The loan policy does not protect the borrower.
What is the danger of loss?
How can there be a title defect if the title has been searched and a loan policy issued?
What title insurance protects against.
What protection does title insurance provide against defects and hidden risks?

What is Title Insurance?
Title insurance is actually a process, with the insurance policy being the end product. This process starts with a comprehensive search of public records to determine if any liens or other encumbrances are attached to the title. During the search, detailed information from a number of sources is gathered and reviewed, including tax records, federal, state and local records, court judgments, deeds and an evaluation of whether the property characteristics are accurately reflected by the information on the title. Not surprisingly, one in four title searches uncovers some problem that must be rectified prior to the closing.

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What kind of problems?
There are four primary categories that can cloud a title and result in significant risk for a prospective homebuyer. The title search meticulously seeks out and evaluates any known indication of any of these issues; however, even the most comprehensive search may not uncover every hidden area of title risk:

Liens can be placed against a title by any party with an unpaid financial obligation against the property owner. The nature of these claims can be everything from unpaid child support or alimony to unpaid parking tickets or bills from contractors like electricians or plumbers.

Errors may have occurred during the course of previous ownership changes that could have included recording errors, typographical errors, incorrect legal descriptions, incorrect indexing of land records or title search errors resulting from undisclosed issues like unsatisfied claims not shown in the public record.

Claims against a property may come from missing heirs or heirs born after the execution of a will, the marital rights of spouses of former owners, claims from ex-spouses or even from government or corporate entities. They can also arise when the mental competence of a grantor of deed is called into question; when wills are not properly probated or are misinterpreted; when a title was transferred by a minor; or when a grantor of a deed did so while under undue influence.

Fraudulent activity such as forged signatures or fraud in the execution of documents, the use of false powers of attorney in the execution of documents, false impersonation by someone claiming to be the owner of the property or any other fraudulent activity can invalidate any title work that occurred from that point on.

Prospective buyers should be certain they know what issues affect the title of the property they plan to buy and recognize that even new construction properties can be subject to these same kinds of problems. Buyers should make sure that all issues that come to light from the title search are adequately resolved prior to the closing.

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What does title insurance cover?
Once the title search has been concluded and curative work to resolve any issues has been completed, title insurance can then be issued. The title insurance policy protects policy owners against covered financial losses associated with claims against the title that were not discovered during the title search process. It also insures against the title being rejected by the subsequent buyer of your property due to pre-existing title defects and covers losses that may arise after the property is sold if title covenants were included in the sales contract. This includes attorney fees and costs associated with defending the title and insures that the policy holder is the legal owner and has access to the property. Since the final title insurance policy may have some coverage exceptions, policy owners must carefully read the coverage information for their specific policy provisions.

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Who is covered by title insurance?
There are two different kinds of title insurance policies, and each covers a specific type of policy owner:

Owner’s title policies are not required for homebuyers, and in many jurisdictions an Owner’s policy is not offered during the mortgage process. As a result, homebuyers are left without title risk coverage and often don’t know they had a choice. Without an Owner’s policy, homebuyers must pay for title curative work out-of-pocket including legal fees and the equity they have in their property can be at risk. However, with an Owner’s title insurance policy in effect, the homeowner’s investment is fully protected since the policy usually covers buyers up to the full sale price.

Lenders title policies and Owner’s title policies cover many of the same things. In both cases, the policy holders are protected from title risks such as title search errors, claims by missing heirs or ex-spouses, forged signatures in the chain of title and many other title problems that could go undetected before the closing. Attorney fees and settlement costs are also covered up to policy’s limit.

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Why do you need title insurance?
To protect probably the most important investment you’ll ever make- the investment in real estate. A lender goes to great lengths to minimize the risk of lending money for the purchase of real estate. First, credit is checked as an indication of the borrower’s ability to repay the loan. Then, the lender seeks assurance that the quality of the title to property to be acquired and which will be pledged as security for the loan is satisfactory. The lender does this by obtaining a loan policy of title insurance. Doesn’t it make sense to protect your interest as well?

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The loan policy does not protect the borrower.
The loan policy protects the lender against loss due to unknown title defects. It also protects the lender’s interest from certain matters which may exist, but may not be known at the time of the sale.

But, this policy only protects the lender’s interest. It does not protect the borrower. That is why a real estate purchaser needs an owner’s policy, which can be issued at the same time as the loan policy, usually for a nominal one-time fee.

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What is the danger of loss?
If the lender has title insurance protection and owner does not, what possible danger of loss exists?

As an example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien, or beneficial interest. The lender acquires title insurance protecting the lender’s interest up to $80,000, but the purchaser’s down payment of $20,000 is not covered.

What if some matter arises affecting the past ownership of the property? The title insurance company would defend and protect the interest of the lender. The purchaser, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title.

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How can there be a title defect if the title has been searched and a loan policy issued?
Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.

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What title insurance protects against.
Here are just a few of the most common hidden risks that can cause loss of title or create an encumbrance on title:

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What protection does title insurance provide against defects and hidden risks?
Title insurance will pay for defending against any lawsuit attacking the title as insured, and will either clear up title problems or pay the insured’s losses. For a one-time premium, an owner’s title insurance policy remains in effect as long as the insured, or the insured’s heirs, retain an interest in the property, or have any obligations under a warranty in any conveyance of it. Owner’s title insurance, issued simultaneously with a loan policy, is the best title insurance value a property owner can get.

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