Title insurance is protection against historical mistakes and fraud committed with respect to your home/real estate. Title insurance is a policy which protects you from unanticipated claims that could cause you to lose your home or incur cost from errors or fraud matters that happened prior to your taking ownership. You may never need to make a title insurance claim. And most do not. If you do, however, you’ll be glad your home is insured.
Imagine having to leave your home because county records show that the seller who sold you the home never really purchased it himself. Title insurance protects against situations such as these. When a claim is made, your title insurer will research the claim on your behalf and, if necessary, will make you whole for any loss incurred.
Title insurance is purchased at the time of closing and is a line-item on your settlement statement. It’s a one-time cost. Title insurance is not paid annually.
It is the seller’s obligation to sell you a home with “clear title”. This means that you are buying a home with no liens, encumbrances, or claims to which you did not agree, and which are known to the seller or the title insurer.
However, mistakes occur, and you don’t want to be on the receiving end of a title claim. Note that none of the reasons for a claim will be “your fault”, necessarily. Title claims are often the result of oversight or error.
Here are few examples of potential claims against your title:
- Your home sale was not properly recorded in the public record
- The seller’s home loan was not properly paid off, or was not recorded as “satisfied”
- Evidence of an undisclosed prior mortgage which was not paid at closing
- Forged notarizations and/or forged witness acknowledgement
- A “newer” will is discovered after probate of an initial will
Again, none of these claims may be your fault, however, you’ll still be affected by the claim. Title insurance is protection. And your title insurer will do its best to search for issues before your closing occurs. This is known as a title search.
Title searches are hunts for flaws on a home’s title. The search is performed by the title insurer and involves an extensive hunt through public records and private databases in order to locate claims of interest to a property which currently, and previously, existed.
These claims of ownership are compiled into a document called a “title report”. The title report includes the full legal description of the property; a summary of real estate tax payments due and paid; and, recent claims made to the property along with notes stating whether those claims have been satisfied (i.e. are no longer in effect). Title search errors are covered by your title insurance policy.
There are two main types of title insurance involved when purchasing real estate:
Owner’s Title Insurance – This protects the owner for the entire time they own the property. In WA State, typically the Seller pays the premium for the Owner’s Title Insurance.
Lender’s Title Insurance – The party purchasing the home and obtaining financing will pay the premium for the Lender’s coverage or Loan Title Policy. This coverage protects the lender up to the full amount of the loan and runs through the life of the loan. A title search is performed to identify encumbrances and liens and any unsatisfied claims are addressed prior to closing.
With the title policy in place, in the event of an error or claim, your lender can be reimbursed for losses.
Premiums are paid up-front at closing with nothing due over the remaining years of a loan with the Lender’s Title Insurance or years of ownership of the property in the case of the Owner’s Title Insurance. With the Lender’s coverage, the policy expires when the current loan is paid-in-full. When you refinance, you will be required to purchase a new lender’s title policy for the new lender and new loan. Rest assured, title insurance claims are few and far between.
Historical issues before title insurance
Prior to the institution of title insurance, purchasing real estate in the United States was a far riskier venture. During a property transaction, conveyancers would establish the rights of title to a property based on public records searches or other property abstracts. The title would necessarily be cleared of any liens, rights or other encumbrances prior to conveying the property to new buyers or lending against the property; however, with limited resources and no insurance backing, the risk of losing a property due to unresolved issues was still significant. Additionally, if an unresolved issue caused problems, the harmed borrower or lender would have to prove legal negligence in order to collect damages from the conveyancer for his or her errors, which can be difficult.
Title insurance came in to the picture in the late 1800s as a way to insure/protect Buyers from past problems and to insure and protect Lenders at the same time. It is somewhat rare that anyone these days has an issue with their property since title searches and title insurance has been part of our modern world for over 100 years now and the fact that records and data are collected and automated. It is still important to have the coverage though to protect what is probably one of your largest assets.