A question that comes up continuously in real estate transactions is—“What is title insurance for and why do I need it?”
Title insurance is important because it protects buyers of real estate and lenders against any property loss or damage they might experience because of liens, encumbrances or defects in the title to a property. You can’t tell by looking at a property and the current deed whether the title is good. For all you know, the people you bought the house from might have gotten a second mortgage on the property two days before closing, or neglected to pay a $5,000 special assessment for the new sewer. Maybe the swimming pool is located right on the gas company’s easement for underground lines. Perhaps the prior owner decided not to tell you that her ex-husband has a lien that is a claim on the property for repayment of debt. Specifically, title insurance protects against claims from defects. Defects are things such as another person claiming an ownership interest, improperly- recorded documents, fraud, forgery, liens, encroachments, easements and other items that are specified in the insurance policy. Buyers and lenders need title insurance in order to be insured against various possible title defects. The buyer, seller and lender all benefit from issuance of title insurance. Different than other types of insurance, a title insurance policy insures a property against events that occurred in the past and the people who owned it, for a one-time payment paid at the close of the escrow.
Just as health insurance companies refuse to insure people with a history of medical problems, title insurance companies refuse to insure properties with a history of legal uncertainties. Accordingly, the title examiner looks through the records and identifies any potential problems, such as an unpaid tax assessment or a neighbor’s easement for right-of-way. The examiner then issues a preliminary report, which lists these defects and informs you of any problems that the seller must correct prior to closing. If the company isn’t willing to cover a particular matter and the seller can’t or won’t correct it, you have a choice whether to live with the problem or bow out of the deal. If a title insurer refuses to write the policy at all, you can bet that the seller can’t give you good title.
After the sale or loan is closed and the transaction completed, a policy is issued detailing the encumbrances that remain in effect. These encumbrances have been accepted by the Buyer and/or lender involved in the transaction and may include the new financing encumbrances as well as other exceptions like covenants, conditions and restrictions or utility easements.
An Owner’s policy is issued for the full purchase price and is typically paid for by the Seller. An Owner’s policy is, in effect, up to the amount of the policy until the property is sold and title is passed to new purchasers.
A Lender’s policy is issued to the new lender for the amount of the new loan and is typically paid for by the Buyer or borrower. The Lender’s policy is in effect until the loan is paid in-full and the obligation released.