Real property is the nation’s largest asset, and title insurance is key in protecting real estate transactions. In fact, protecting the parties involved in real estate transactions is the reason the title insurance product was first developed.
Matters affecting ownership and other real estate interests are entered in public records. Before a transaction is completed, a title search of the records is made to locate potential problems so that they can be corrected, and the transaction can proceed. While most problems can be located in a title search, there can be issues that even the most careful search will not identify. 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.
Title Insurance: Risk Prevention
Title insurance is very different than other types of insurance coverage. Title insurance emphasizes risk prevention rather than risk assumption. Said in another way, title insurance insures against events that happened before the policy is issued, as opposed to insuring against events in the future. This emphasis offers the best opportunity for avoiding claims and losses in real estate transactions.
Most Common Title Issues
More than one-third of all real estate transaction have title issues, which must be cured before closing. The most common problems include:
- Liens
- Unpaid mortgage
- Judgments
- Recording errors of names, addresses and legal descriptions
- Bankruptcies
- Undisclosed heirs and wills
- Boundary disputes
- Forgeries
- Easements
Title Insurance Protection
Title insurance protects all parties to a real estate transaction, including:
- Lenders
- Sellers
- Buyers
- Real Estate Brokers
Lenders
A Title Policy protects lenders against loss of capital from title hazards. By identifying and eliminating this risk, lenders are more likely to invest in mortgage loans. A Loan Policy guarantees the lender a valid and enforceable lien and assures that no claimant other than those noted in the policy has a prior claim against the real estate. The policy assures that the purchaser-borrower has title to the property being pledged as security for the loan. And the policy obligates the title insurer to pay for defending any claim filed against the title that might supersede the lender’s lien.
Sellers
Sellers need assurance that title is marketable in order to sell the property. Title insurance allows mortgage money by identifying and resolving title issues and insuring against title risks.
Upon the sale of the property the seller is left with its old title policy obtained when the seller originally purchased the property, but the amount of coverage is limited to the original purchase price. That coverage could possibly be much less than the current selling price. In certain instances, a seller may be able to purchase a seller’s or “joint protection” policy. This will give the seller additional protection if the buyer sues the seller for a title defect covered by the policy. Also, if a title company pays a claim for to a buyer a title defect, the title company can subrogate and seek repayment from the seller. The seller’s policy will generally eliminate this subrogation risk.
Buyers
An Owner’s Policy offers protection against many hazards, including those even a careful search of the public records do not disclose, such as forgeries, missing heirs or recording errors. The Owner’s Policy will pay also claims and defense costs against challenges to the title. A homeowner’s policy will protect the owner for as long as the owner has an interest in the property.
Affirmative coverages are built into the policy for such matters as off-record survey-related issues, easements, boundaries, and encroachments. And it includes significant areas such as certain zoning problems (including relating to building permits) and platting irregularities.
