What Is Title Insurance?
When a title order is placed, a search of the public records is completed. Based on what is identified by the search, a title commitment is prepared. A title commitment is an offer to provide a title insurance policy, subject to the items that are on the commitment. The commitment provides information about:
- Who owns the property
- Outstanding taxes
- Outstanding mortgages or liens that the ownership interest is subject to
- Any recorded documents that affect the property.
A title insurance policy insures that the purchaser owns the property and that there are no issues other than the ones listed on the title insurance policy as exceptions. Typically, at or before the real estate closing, the outstanding liens and taxes are paid so that the title is clear of any prior interests.
What claims or losses are covered by the contract are outlined in the title insurance policy that is issued. The two most common policies issued are the Owner's Policy of Title Insurance and the Loan Policy of Title Insurance.
Owner's Policy of Title Insurance
An Owner's Policy of Title Insurance is issued to the purchaser. It protects the purchaser against errors, liens, claims to ownership, and invalid deeds.
Loan Policy of Title Insurance
A Loan Policy of Title Insurance is issued to the lender. It insures that the lender's interests have priority over other liens on the property. Generally, lender claims arise when a mortgage is in default.
Title Insurance is Different from Other Insurance
Title insurance insures against things that occurred in the past, Other forms of insurance insure against future events. Title Insurance has a one-time premium. Other forms of insurance typically have monthly, quarterly, or annual premiums.
Title Companies and title agencies identify and rectify issues before the real estate closing. As a result, title insurance claims are less frequent than with other forms of insurance. More of the premium is applied to the upfront work done. Despite the work that goes into risk minimization, hidden defects can emerge after the completion of a real estate purchase. Title insurance is there to protect the policyholder if hidden risks are identified. Examples include:
A forged deed that transfers no title to real estate
Previously undisclosed heirs with claims against the property
Someone in the chain of title who conveyed title was not mentally competent
Errors in the public record