What is Title Insurance?
Title insurance is a special type of
insurance that protects the beneficiary (insured) from loss in the
event that it is determined that another person holds an interest
in the real property subject to the insurance. Unlike many other forms
of property which generally follow the "possession is 9/10ths of the
law" theory, ownership of the full bundle of rights in real property
is not always so clear. The law provides for many types of limitations
on real property ownership -- from easements, to restrictive covenants
and licenses. In addition, there can be defects in a chain of title,
or overlooked interests resulting from improper transactions in probate
(after the death of a person who held a prior interest in the property).
Thus, when real estate is transferred from the vendor (seller) to
the vendee (buyer), and the real property is used as security for
a loan, the lender will ordinarily obtain 'Lender's Title Insurance'.
Subject to the conditions stated in the insurance policy, the insurer
will pay the lender if, as a result of a title defect, the lender
is unable to obtain full satisfaction of its indebtedness from the
real property (i.e. lender is insured that it will be paid first before
all other lien holders). This is different from 'Private Mortgage
Insurance'. PMI is insurance that the lender will recover a set amount
from any foreclosure. Owner's Title Insurance is insurance that the
stated owner has fee simple title in the real property.
Tip: Lender's Title Insurance will not protect the owner's equity
in real property. Owner's Title Insurance is not very expensive ($100-300).
If a title defect does appear, or if someone asserts a title defect,
even if the claim is without foundation, it will cost you at least
$200 just for a competent lawyer to review the matter. It is better
to pay that money to the insurance company. If a real title defect
appears, they have to both defend you, and indemnify you from loss.
What is the difference between Title Insurance and Casualty Insurance?
Title insurers work to identify and eliminate risj before issuing a Title Insurance policy. Casualty insurers assume risks.
Casualty insurance companies realize that a certain number of losses will occur eash year in a given category (auto, fire, etc.). The insurers collect premiums monthly or annually from the poilcyholders to establish reserve funds in order to par for expected losses.
Title companies work in a very differenc manner. Title insurance will indemnify you against loss under the terms of your policy. However, title companies work in advance of issuing your policy to identify and eliminate potential risks and therefore prevent losses caused by title defects that may have been created in the past.
Title Insurance also differs from casualty insurance in that the greatest part of the Title Insurance premium dollar goes towards risk elimination. Title companies maintain "title plants" which contain information regarding proprty transfers and liens reaching back many years. Maintaining these title plants, along with the searching and examining of title, is where most of your premium dollar goes.
Who needs Title Insurance?
Buyers and lenders in real estate transactions need Title Insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage, subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies.
What does Title Insurance insure?
Title Insurance offers protection against claims resulting from various defects (as set out in the policy) that may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess your property.
Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have alien on your property securing the repayment of a debt. That property may be an empty lot or it may hold an office tower. Title companies work with all types of real property.
What type of policies are available?
Title companies routinely issue two types of policies: An "owner's" policy which insures you the homebuyer for as long as you and your heirs own the home. They also issue a "lender's" policy which insures the priority of the lender's security interest over the claims that others may have in the property.
What protection am I obtaining with my title policy?
A Title insurance policy contains provisions for the payment of hte legaslfees in defense of a claim against your property, which is covered under the policy. It also contains provisions for indemnification against losses which result from a covered claim. A premium is paid at the close of a transaction. there are no continuing premiums due, as there are with other types of insurance.
What are chances of ever using my Title policy?
In essence, by acquiring your policy, you derive the important knowledge that recorde matters have been searched and examined so that Title insurance covering your property can be issued. Because we are at risk eliminators, the probablility of exercising your rights to make a claim is very low. However, claims against your property may not be valid, making the continuous protection of the policy all the more important. When a title company provides a legal defense against claims covered by your Title Insurance policy, the savings to you for the legal defense alone may exceed the premium.