The Basics of Title Insurance

Joe Thompson bought ten unclaimed lots from the County at a forfeited land auction. Joe didn’t order a title search and did not obtain a title insurance policy on these lots. When Joe later tried to sell these lots, he discovered that another person was claiming ownership of these lots through a separate, unknown chain of title. Joe hired an attorney to defend his claim of ownership.

Joe’s attorney hired a title abstractor to perform a complete and thorough title search and discovered that Joe only had valid title for TWO of the ten lots! Even worse, the only access to these lots was a road through the other eight lots. In the end, Joe lost title to eight of the lots, had to pay for an access easement, and had to pay for his defense costs.

Although this situation could not have been avoided with a title insurance policy, Joe’s losses could have been.

An owner’s title insurance policy is a vital piece of protection on a person’s largest investment: their real estate. Title insurance guards against any number of things and events which could risk your ownership of property or its value. So what does title insurance protect against? Your policy could protect against an unsatisfied mortgage or lien, an unknown easement, use restrictions, or unknown claims of ownership. The majority of unknown claims come in the forms of:

• Fraudulent deeds

• Incorrect marital status of grantors

• Undisclosed heirs

• Wills not properly probated

• Incorrect interpretation of wills or trusts

• Mental incompetence of grantors

• Ineffective powers of attorney

• Non-Delivery of deeds

• Identical names

• Incorrect indexing

• Clerical errors

• Much more

Title insurance will cover the cost of these claims, and others, that may impact your interest in the property which are not specifically excluded in your policy.

My lender obtained a title insurance policy, why do I need to?

This is often a source of confusion for home buyers. They hear that their lender is buying a title policy, so the buyer assumes they do not need one. Unfortunately, the lender’s policy does not necessarily protect or compensate you. The lender’s title policy only insures its own interest in the property, i.e., the financed balance secured by the property.

Their policy does not insure the equity you have in your home, or any expenses you incur in defending your interests. Getting your own title insurance will protect the equity in your property and covers the expenses in defending your rights. And title insurance only requires a minimal, one-time premium and will cover you for as long as you own the property.

Can’t I just order a title search on the property?

Yes, you can have a title search ordered and reviewed for the property. And this is strongly recommended on any real estate purchase, and is generally required on any financed purchase of real estate. However, the title search does not always find everything, or is not able to find everything that may be out there.

If, for example, a deed was improperly indexed or was entered incorrectly by the clerk’s office, or a will was not properly probated, these defects would not show up on the title search. If you purchase the property with a title insurance policy, and a covered defect shows up later, your insurer provides indemnity against losses within your policy limits.

Let’s look at the first scenario again, but this time if Joe had purchased a title insurance policy:

Joe Thompson buys ten lots from a forfeited land sale, and obtains a title insurance policy with a $50,000 policy limit. When Joe later tried to sell these lots, he discovered that another person was claiming ownership of these lots through a separate, unknown chain of title. Joe filed a claim with his title insurer to defend his claim of ownership or compensation for his losses.

The title insurer hired an attorney to perform a complete and thorough title search which discovered that Joe only had valid title for TWO of the ten lots! Even worse, the only access to these lots was a road through the other eight lots. The value of the lost lots and the decreased value to the two other lots due to lack of access exceeded the policy limits. Joe Thompson’s insurer paid for all defense costs and paid to Joe the full $50,000 policy limit.

As you can see, the mere change of having a title insurance policy in place can make a world of difference in these situations.