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Understanding Title Insurance
What is
title insurance? Newspapers refer to it in the weekly real estate sections
and you hear about it in conversations with real estate brokers. If you've
purchased a home you may be familiar with the benefits of title insurance.
However, if this is your first home, you may wonder, "Why do I need yet
another insurance policy?" While a number of issues can be raised by that
question, we will start with a general answer.
The purchase of a home is one of the most expensive and important
purchases you will ever make. You and your mortgage lender will want to
make sure the property is indeed yours and that no one else has any lien,
claim or encumbrance on your property.
The Land Title Association, in the following pages, answers some questions
frequently asked about an often misunderstood line of insurance -- title
insurance.
What is the difference between title insurance and casualty insurance?
Title insurers work to identify and eliminate risk before issuing a title
insurance policy. Casualty insurers assume risks.
Casualty insurance companies realize that a certain number of losses will
occur each year in a given category (auto, fire, etc.). The insurers
collect premiums monthly or annually from the policy holders to establish
reserve funds in order to pay for expected losses.
Title companies work in a very different manner. Title insurance will
indemnify you against loss under the terms of your policy, but 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 property 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) which 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 a lien on your property
securing the repayment of a debt. That property may be an empty lot or it
may hold a 50-story office tower. Title companies work with all types of
real property.
What types 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; and 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 the legal
fees in defense of a claim against your property which is covered under
your 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 my chances of ever using my title policy?
In essence, by acquiring your policy, you derive the important knowledge
that recorded matters have been searched and examined so that title
insurance covering your property can be issued. Because we are risk
eliminators, the probability of exercising your right 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 that legal defense alone
will greatly exceed the one-time premium.
What if I am buying property from someone I know?
You may not know the owner as well as you think you do. People undergo
changes in their personal lives that may affect title to their property.
People get divorced, change their wills, engage in transactions that limit
the use of the property and have liens and judgments placed against them
personally for various reasons.
There may also be matters affecting the property that are not obvious or
known, even by the existing owner, which a title search and examination
seeks to uncover as part of the process leading up to the issuance of the
title insurance policy.
Just as you wouldn't make an investment based on a phone call, you
shouldn't buy real property without assurances as to your title. Title
insurance provides these assurances.
The process of risk identification and elimination performed by the title
companies, prior to the issuance of a title policy, benefits all parties
in the property transaction. It minimizes the chances that adverse claims
might be raised, and by doing so reduces the number of claims that need to
be defended or satisfied. This process keeps costs and expenses down for
the title company and maintains the traditional low cost of title
insurance.
Article by CLTA
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