Many buyers and sellers know little or nothing about title insurance. This is hardly surprising, because the subject is fairly esoteric and can be confusing (not to mention boring) to most people. However, title insurance is a critical part of a real estate transaction, and it’s worth taking just a few minutes to become familiar with the concept.
Title insurance defies easy definition, but try this rough analogy on for size: Let’s say you wanted to purchase some health insurance. Let’s imagine that you go to an insurance company that doesn’t cover any pre-existing conditions. That company would look through your medical history, run tests, talk to your doctor, interview your previous doctors… all in an attempt to find out as much as possible about your medical history. Lucky you, all they can find is that you have a bum ankle and some premature gray around the temples. Okay, says the insurance company, you’re healthy as an ox. We’re so confident in our skill at finding out any pre-existing conditions that might threaten your health that we’ll insure you against any health problems you have that we don’t know about - your heart, your liver, hangnails, whatever. The only thing we won’t insure you for is any condition which results from your bum ankle or your gray hair.
Title insurance is kind of like that. Our fantasy health insurance company searches the record of your health; a title company searches the title (or record of ownership) of your house. They agree to provide coverage for problems with the title, like a lien or encroachment, that you don’t know about now, but were caused prior to you buying the property. They will not generally insure you for any problems or defects they do discover at the time they do the title search.
Why is this so important? Because any defects on the title that can’t be resolved can delay or imperil the sale of the property. And any defects which are not uncovered become the responsibility of the buyer of the property. So unlike most types of insurance, which cover you against things that may happen in the future, title insurance covers you against things that happened in the past.
I’ve tried to describe title insurance here in manageable terms, but the ins and outs of title can get pretty convoluted. The Wikipedia has a fairly good technical definition of title insurance. I’ll quote a couple of paragraphs here:
A policy of title insurance is a contract of indemnity between the insurance company and the owner of an interest in real property. In plain English, this means that in the event that the insured owner of an interest in the insured property suffers an actual or threatened monetary loss, due to a title defect, lien or other matter of public record created prior to the effective date of the policy, that is not excluded as an exception to the policy, the title insurer will defend the insured against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.
Title insurance differs in several respects from other types of insurance. Where most insurance is the contractual “coverage” where one party indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. Any issues found are either fixed before issuing the title policy or the coverage is specifically written to exclude those items. Title insurers typically pay a very low percentage of their premium revenue out in claims in a given year; industry averages are 5 to 10%.
Commonwealth Title has a web page that explains the title insurance process and who pays for what.
RealEstateLawyers.com – a fantastic resource – has still more about title insurance.
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