Title insurance is substantially different than other types of insurance coverage, which can often lead to a misunderstanding of the product. Title insurance emphasizes risk prevention rather than risk assumption. This emphasis on risk prevention is labor intensive and expensive, but the coverage offers the best possible opportunity for avoiding claims and losses in real estate transactions.
Title insurance can be defined as the insurance of owners of the property or others having an interest therein, against loss by encumbrances, or defective titles, or adverse claims to title, and services in connection therewith. Title insurance is written either for the protection of the potential owner of real estate or the prospective lender.
Title insurance provides the insured with “peace of mind” in knowing that you are receiving good and merchantable title to the real estate you are purchasing. Title insurance is an agreement by the insurer to indemnify the insured against loss or damage arising from defects in the title to the property or by reason of liens or encumbrances thereon. Additionally, the title insurer is obligated to defend the insured, i.e. provide legal counsel at the insurer’s cost in litigation in which a third party asserts a claim adverse to the insured’s title that is not excepted from coverage. The amount of insurance in an owner’s policy is usually the purchase price. The lender’s coverage may not exceed the greater of the amount of the loan, as reduced by payment, or the fair market value of the property.
As we discussed in our blog post What is the “public records doctrine and why does it matter?, matters affecting ownership and other real estate interests are entered in public records. Before a transaction is completed, a title search and examination of the records is made in an effort to locate potential problems so that they can be rectified and the transfer can proceed. Title attorneys find and fix problems with title in nearly 25 percent of transactions – usually with no knowledge by the purchaser or lender. This is risk prevention.
While most problems can be located in a title search, there can be hidden hazards that even the most thorough search will not reveal. Examples include forgeries and impersonations to documents in the chain of title, a claim by a previously undisclosed relative of a former owner, a mistake in the records, lack of competency or capacity of a party to a document in the chain of title, mistakes made in the title examination of the property, clerical errors in recordation of documents procedure, incorrect indexing of documents by the clerk’s office/recorder of conveyances, unsatisfied claims not shown of record or not immediately apparent, and most other interests or claims in the property that have not been properly recorded. This is where title insurance comes in. Title insurers pay millions of dollars annually under policies for claims arising from risks such as these. The types of risks covered by a title policy differ depending on the particular policy purchased.
There are two types of title insurance – owner’s title insurance (an Owner’s Policy), which protects the buyer, and lender’s title insurance (a Loan Policy), which protects the lender. In a typical residential transaction, the title policy often required by the mortgage lender will not safeguard the rights and interests of the homebuyer, therefore, a separate Owner’s Policy is necessary.
An Owner’s Policy is typically issued in the amount of the real estate purchase price, and remains in effect for as long as the owner, or his or her heirs, retains an interest in the property. In addition to identifying risk before a transaction is completed, the Owner’s Policy will pay valid claims and all defense costs against attacks on the title.
∼ Andrew Mendheim
The author of this article has borrowed extensively from the scholarly writing of Mr. Peter S. Title, Louisiana Real Estate Transactions, which has proven to be an invaluable resource for the Louisiana real estate practitioner, and also from First American Title Insurance Company’s web resources.