02/15/2024
What does a title insurance policy protect you against?
The protections afforded by title insurance are essential to closing any real estate transaction in a way that leaves all parties with peace of mind. But while buyers and sellers may be aware of title insurance, fewer people have a complete understanding of how this specific type of insurance benefits the policyholder.
As a result, many real estate brokers, attorneys, and title agents often get questions from their clients along the lines of:
“What does my title insurance policy actually protect me against?”
WHAT IS TITLE INSURANCE, AND WHY IS IT IMPORTANT?
There are two types of title insurance: lender’s title insurance, also called the lender’s policy, and owner’s title insurance, or the owner’s policy.
Title insurance guarantees that the interests of both the buyer and the lender are protected against common title search mistakes or unknown clouds on a property’s title.
Owner’s title insurance protects against financial losses that might occur when title is subject to liens, encumbrances, and defects that were unknown to the buyer and seller on the effective date of the title policy. Lender’s title insurance is similar, but protects against claims that might jeopardize the lender’s priority as a creditor in the event of a foreclosure or other forced sale of the property.
Without the owner’s title insurance, no buyer could ever be totally sure that their substantial investment in a new piece of property is protected. Very few people would invest their family’s wealth in an asset knowing that, at any point, the long-lost heir of a former owner might step forward to invalidate their ownership.
Likewise, lenders would be reticent to offer a mortgage knowing that there are other parties with a security interest in the property. The lender’s title insurance policy ensures that a lender’s priority as a creditor is protected for the lifetime of the loan.
ITEMS TYPICALLY COVERED BY TITLE INSURANCE
In short, the owner’s title insurance is designed to protect the policyholder if some person or party says they have a claim against the home from before it changed hands.
The specific protections afforded by a title insurance policy will vary from policy to policy, and purchasers are encouraged to carefully review the details of any policy with their title agent before completing the sale.
Most policies can be expected to offer protections against losses and legal fees stemming from common title defects such as:
• Fraud, including forgery, undue influence, duress, incapacity, or impersonation.
• Failure of earlier sellers to properly convey title.
• Clerical errors, including electronic filing errors.
• Defective judicial or administrative proceedings that result in claims against the property.
• Undisclosed tax liens due and payable at the time of sale
• Physical encroachments that would have been disclosed by an accurate survey of the land.
• Unmarketable title, or title that is defective and unable to be transferred.
• A lack of access to the property
• Probate issues, such as conflicting wills or undiscovered heirs.
• Fraudulent or erroneous transfers in bankruptcy proceedings
These defects are items that should have been discovered in a title search and property survey, but which were not discovered and corrected before closing through no fault of the seller or purchaser.
Unlike homeowner’s insurance, which protects against future claims for damage or repair, a title insurance policy is backward-looking; it protects against claims that existed at the time of the sale but which, due to imperfect record-keeping, unavoidable error, or a failure of due diligence, were not discovered even in a thorough title search and escrow process.
If you have any questions or need assistance in purchasing title insurance when you are purchasing or selling any form of real estate, reach out to us, we are happy to answer all of your questions.
