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?"

The Importance of Title Insurance

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.

Key Differences from Other Insurance

Title Insurance vs. Casualty Insurance

Title insurers work to identify and eliminate risk before issuing a title insurance policy. Casualty insurers assume risks.

How Casualty Insurance Works:

• Collect premiums monthly or annually
• Establish reserve funds for expected losses
• Assume certain number of losses will occur each year
• Pay claims from reserve funds

How Title Insurance Works:

• Works to identify and eliminate risks before issuing policy
• Prevents losses through careful title research and corrective actions
• Most of premium goes towards research and prevention
• Maintains extensive title records (title plants)

Types of Title Insurance Policies

Title companies routinely issue two types of policies:

1. Owner's Policy

   • Insures you, the homebuyer
   • Protection lasts as long as you or your heirs own the home

2. Lender's Policy

   • Insures the priority of the lender's security interest
   • Protection lasts for the life of the loan

What Title Insurance Protects Against

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. Examples include:

• Someone claiming to have a deed or lease giving them ownership
• Easements giving others a right of access across your land
• Liens on your property securing the payment of a debt
• Building code violations from previous owners

Protection Even When Buying from Someone You 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:

• Divorces
• Changes in wills
• Property use limitations
• Liens and judgments
• Tax issues

There may also be matters affecting the property that are not obvious or known, even by the existing owner.

The Value of Title Search

The process of risk identification and elimination performed by title companies benefits all parties in the property transaction:

• Minimizes the chances of adverse claims
• Reduces the number of claims needing defense
• Keeps costs and expenses down
• Maintains the traditional low cost of title insurance

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.