Both buyers and sellers of real property want the transaction, from escrow through the closing process, to be smooth with minimum costs in terms of time, money and legal problems. Buyers want reassurance that they are the true title holders and that if someone else claims the property, they have the means and resources to protect the investment and pay attorney fees and other costs of defending the title.
A title insurance policy is an insurance policy you buy from a title insurance company when you buy a home or property. It protects you and your lender from loss if a property ownership dispute occurs. The title insurance company searches public records, such as liens, claims, deeds, tax records and maps, to make sure there are no problems in the title’s ownership and history for the property you are buying. A title insurance policy insures the buyer against legal claims to the title or some other ownership interest in the property purchased. Title insurance is required of any property financed through a lender.
The fee for title insurance is usually included in your itemization of closing costs from your lender, and it is a one-time fee. If a problem should occur at a later date, the terms of the policy define covered and excluded losses. The policy takes effect on the issue date and covers defects that arise prior to your ownership. By law, your lender must deliver your policy to you within a reasonable time after it is issued.
There are two types of title insurance:
1. Lender Insurance: protects your lender against any loss that might occur due to unknown title defects. It also guarantees the lender to have a valid first lien against the property.
2. Owner Insurance: protects you, the buyer, from issues that might emerge after you close the sale. Examples of issues may include human error, forged documents, undisclosed or missing heirs, and incorrect legal descriptions. Only an owner’s policy will protect you from personal loss, such as legal expenses for a dispute after the sale. There are no annual premiums with owner insurance. You pay when the policy is issued. It insures you for as long as you own the property. This protection is limited to the face amount of the policy, which is usually the market value of the property when you buy it. It does not cover increases in the value of your property. If you want to cover the increased value of your property, you may buy additional coverage through your title insurer.
If another person has an interest (or claims an interest) in your property it creates a cloud on title. A cloud on title in the chain of title reduces the value and marketability of the property. This is bad for all parties involved. Generally, to remove a cloud on title the owner must file a suit-to-quiet-title; in other words, a suit to remove the cloud whereby the court determines the rightful owner of the property.
We don’t need to get bogged down in the legal details here, but suffice it to say, a title policy is a good investment to avoid this potential nightmare. If you, the buyer, obtain a title policy and somewhere down the road someone else claims title to your property, your title insurer is obligated to defend you…and that is why you get a title policy!