Title Insurance: What it is and why you need it

Procuring insurance to protect individuals and their property is a familiar concept to most.  In general, people recognize the importance of having health insurance to cover expenses from injury or illness and insuring their homes and personal property against loss or damage from accidents, theft, fire, floods, hurricanes, burglary, or vandalism.  However, the idea of title insurance may not be as familiar.

The purchase of real estate is often one of the biggest single investments in one’s life.  When contemplating a real estate purchase, buyers consider many factors such as location, condition of the property, price, and size.  Often, buyers take for granted that the person who is selling the property is the actual owner and can transfer title to the property to the buyer.  Depending upon the age of the property, title could have passed through countless hands in the time leading up to the buyer’s purchase.  There could be liens from someone who performed work on the property, unpaid taxes, easements, or prior owners, creditors, or heirs that attempt to claim some right or interest in the property. 

Issues that affect the free and clear ownership of real property are referred to as “clouds on title.”  Ensuring that title to the property you are buying is free of clouds such as liens, encumbrances, and adverse claims is critical.  While modern technology and comprehensive record keeping allow for verification of the chain of title and present ownership, there can be unknown and unforeseen issues that can jeopardize the owner’s interest in the property.  Some clouds may even be unknown to the seller.  That is where title insurance plays a crucial role.

Many purchasers of real property, especially foreign investors, have never heard of title insurance, do not know its function, and are uncertain as to whether they need it.  This article will explore the concept of title insurance, the protections it offers, the different types of title policies, and why title insurance is necessary.

Title is the fundamental concept in real estate ownership and evidences one’s legal right to own, use, possess, encumber, and sell real property.  While the concept of title exists in many countries and jurisdictions around the planet, title insurance is predominantly found in the United States.  It is a unique form of indemnity insurance used in real estate transactions that insures against loss stemming from defects or disputes with respect to title and the unenforceability of liens held by mortgage lenders.  In the event that there is a challenge to your title to property brought by another, your title insurance underwriter (the company that issues the policy and indemnifies you against loss), will defend your title and pay the related costs and any loss in property value suffered as a result of an adverse claim.  Unlike conventional insurance where you pay a monthly or annual premium for as long as the policy is active, with title insurance you only pay a single, one-time premium and the policy is in effect for as long as you own the property.

Although there are three types of title insurance policies, the two most common are the owner’s policy and the lender’s policy.  An owner’s policy is generally bought at the time the property is purchased and transferred to the new owner and provides coverage and indemnity against claims to title made by third-parties.  Typically, coverage is provided in an amount equal to the purchase price.  Although not legally required, purchasing an owner’s policy is a wise decision that provides considerable, ongoing protection for a relatively small investment.  A lender’s policy is almost always required by a lender who is giving a loan for the purchase or refinancing of real property that is secured by a real estate mortgage. A lender’s policy indemnifies the lender against the loss of the enforceability or priority of its mortgage lien.  The amount of coverage provided by the lender’s policy is most often the amount of the loan that is secured by the mortgage on the property.  Less common is the leasehold policy of title insurance, which is purchased by a tenant with a high value lease to protect its leasehold title to the property from third-party claims.

Title insurance, although not always legally required, is necessary to guard against claims by third parties that can jeopardize one’s property rights.  It provides security and peace of mind to owners of real property.  It ensures that they will not lose their property, and their considerable investment, due to fraud perpetrated by an unscrupulous seller, unsatisfied liens, or other third-party claims that cloud title.  We recommend to all buyers of real property to protect their property rights and the future rights of their heirs by consulting with a competent real estate attorney and purchasing the appropriate policy of title insurance.  

Real EstateMaria Moller