What is Title Insurance?

When a person or business purchases a home or other real estate, they are really purchasing the “title” to the property – which is the right to occupy and use the space.  The term “title” is the term used to describe the legal rights to own, possess, use, control or dispose of real estate (property).   Title to property can be described in terms of “bundle or rights” or “bundle of sticks,” where each stick represents a distinct and separate right, which may be the right to use the real estate, to sell it, to lease it, to give it away, to enter it, to use it, build structures, subdivide, develop, drill oil, etc. The rights (sticks) can be sold or given away individually or in groups and they can be valued as a whole or separately.

In this country, matters affecting title are often entered or recorded in the official public records, which in many states is the County’s Recorder’s Office where the property is located.  Before a purchase or other real estate transaction is completed, a title search of the records is made in an effort to locate potential problems so that they can be rectified and the transfer can proceed.   However, “one out of every four real estate transactions shows evidence of title problems.”  These types of claims can infringe upon the title and may result in the owner losing the property or not being able to use it the way the owner had intended.

Prior to the invention of title insurance, buyers in real estate transactions bore sole responsibility for ensuring the validity of the land title held by the seller.  If the title were later deemed invalid or found to be fraudulent, the buyer lost his investment.   While most problems can be located in a title search by skilled professionals, there can be hidden hazards that even the most thorough search will not reveal. Examples include forgeries in the chain of title, a claim by a previously undisclosed relative of a former owner, or a mistake in the records.

An individual attorney or title searching firm may not have the financial wherewithal to protect the property owner.  The purpose of title insurance is protect the parties in real estate transactions regarding their legal rights and interests, and assuring that land transfer is expeditious and secure.

Title insurance is a type of insurance policy.   A title insurance policy is a contract between the policyholder (insured) and insurance company (insurer) that provided that iIn exchange for a one time premium payment, the title insurer will protect (defend and indemnify) the insured against covered title problems according to the terms and conditions of the policy.   Like all other types of insurance, an insured may have additional rights as provided by state law that are not expressly stated in the title policy.  Additionally, in many states, title insurers are subject to the common law duty of good faith and fair dealing, which generally means that the insurer is supposed its insured’s interests of its interest.   An insurer’s breach of duty of good faith and fair dealing is called insurance “bad faith.”

Title insurance protects property owners, lenders, easement holders, and almost anyone else that has an interest or right in real estate against problems relating to the property’s title.

Some examples of title problems:

  • Someone forged a signature in a past transfer of the title from one owner to another.
  • Unpaid real estate taxes on the property.
  • A claim from an heir of a previous owner
  • Defects, liens, and encumbrances against the property.
  • Easements against the property.
  • Encroachments against the property.

There are two basic types of title insurance policies:

  • Owner’s policy
  • Loan policy

The cost of a title insurance policy is generally relative to the cost of a property transaction, ½ to 1% of the purchase price, but the pricing varies by state.   In some states an insured can shop for the best prices, but in other states, title insurance premiums are determined by the state’s Department of Insurance.

Of course the types and extent of coverage depend on the terms of the actual policy that was issued.  There are various forms and types of policies issued by the various title insurance companies.   Whether a particular title problem is covered under a title insurance policy depends on the terms and conditions of the policy.  However, like all insurance, sometimes mistakes are made when the policy is prepared so that particular items or problems that should have been covered are mistakenly not covered.  If that happened,

In the event that an insured discovery a title problem or a claim is made against an insured because of a title problem, the title insurance company is supposed to defend and indemnify  the insured.  More about title claims on the Title Claims page.

Citations:

Keith Turner, Esq. – practicing title insurance law in California since 1991;

Answers to Your Questions About TItle Insurance, Arizona Department of Insurance  www.id.state.az.us/publications/Title_Ins_Brochure.pdf

How your Title Insurance Dollar is Divided Up, by Sandy Gadow www.homeclosing101.org/insurance_dollars.pdf;

John Briscoe, The Rise of Land-Title Insurance in California http://www.clta.org/for-consumers/history-of-title-insurance.htm;

TITLE INSURANCE: A COMPREHENSIVE OVERVIEW, www.alta.org/about/TitleInsuranceOverview.pdf

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