Title Insurance – What is It and Why Are you Paying for it?
Almost everyone is familiar with some form of insurance coverage: insurance for your car, your life, medical/dental insurance or fire insurance on your home. But what exactly is “title” insurance? The short explanation is that title insurance can be called upon to “fix” problems in the quality of a property’s title (that is your claim to as the undisputed owner and controller of the property) when those problems are not discovered before the property was purchased. It is necessary because title problems are fairly common (see our prior article on Common Title Problems).
The Title Search
After your sales contract has been accepted, a closing agent, such as our law firm, will search the public records to look for any problems with the home’s title. This search typically involves a review of land records going back sixty or more years. Approximately one-third of all title searches reveal a title problem that should be fixed before you go to closing. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor. Or the previous owner may have failed to pay local or state taxes (See our prior article on Common Title Problems). The quality of your closing agent has a big impact on whether something found in the title search is considered a “title problem” and if so, whether it’s brought to your attention and later fixed. Even with the best closing agents, no matter how careful or efficient, human beings can make mistakes which could ultimately result in financial loss if not insured.
Two Types of Title Insurance Policies
There are two types of title insurance policies: Owner’s Title Insurance and Lender’s or “Mortgagee’s” Title Insurance. An Owner’s Policy is issued in the amount of the purchase price and insures the title to the property for as long as the insured person owns the property or has liability through warranties of title. A Mortgagee’s Policy insures the lender in the amount of the loan against the invalidity or unenforceability of the new mortgage. The policy decreases as the loan is paid down and expires upon payment in full of the loan. Separate title insurance policies protect different interests.
Homeowners assuming that they are adequately covered without the protection of title insurance may learn a costly lesson. It is important to know that the mortgagee policy does not provide coverage for the homeowner. Also, a prior owner’s policy will not protect a new buyer. Consider, for example what would happen if upon the purchase of a new home the buyer were to rely on the seller’s owner’s policy and later discovered a previous undisclosed interest or that a large judgment or tax lien was filed against that seller after he took title to the property. Or, suppose the individual purporting to sign the deed as your seller’s wife was an imposter (believe it or not, that happens!). Although title insurance agents make every effort to eliminate the risks involved in the purchase or mortgage of real property, there will always be certain risks for the buyers and investors. The only way to be covered for these catastrophes is to purchase title insurance coverage.
The title insurance policy insures your interest subject to exclusions stated in the policy and insures against loss or damage resulting from: Any title risks covered by that policy up to the amount of the policy; and any costs, attorneys’ fees and expenses we have to pay under the policy. Don’t assume that your property has no title problems or that you have adequate insurance simply because the closing agent issues a title policy. The coverage afforded by a title policy can be “gutted” with excessively broad exclusions. You should ask specifically what your policy will cover – you’re entitled to know because you are paying for it!
If a claim is made against your title as insured, the title insurance underwriter protects you by defending your interest in any court case and paying the costs, attorneys’ fees, and expenses incurred in that defense. If the claim is proven to be valid, the title insurance underwriter will pay the costs of your claim, up to the amount of the policy or will undertake the responsibility of perfecting the title as insured at its own expense.
Summary
In summary, the benefits of title searches and insurance are: (1) clears title problems, (2) pays valid claims, and (3) provides a defense for claims attacking the title as insured. Finally, unlike most types of insurance, the title insurance premium is paid only once. If the owner’s and lender’s policy are purchased simultaneously, there is a substantial discount.
Fiffik Law Group, P.C. provides a full range of services to residential and commercial buyers and sellers. We are approved attorneys for Fidelity National Title Insurance Company, Commonwealth Land Title Insurance Company, Chicago Title Insurance Company and Conestoga Title Insurance Company. Our real estate services group consists of Michael E. Fiffik, Esquire and Lacey Gordon, Esquire. Reach them at 412.391.1014.