What is Title Insurance and How Does it Work?

Monday, April 30, 2007
Contributed by: James Wester and Wade King

Have you ever wondered why you are buying title insurance and why it is important? For most people, their home is usually their largest single purchase. Title insurance helps to protect your title to that asset. More specifically, your owner's title insurance can offer financial protection against title problems by negotiating with third-parties, paying claims and/or paying the legal fees involved in defending your title.

You know that you will need to purchase insurance coverage to protect your home and personal property. We all understand that homeowner's insurance protects us against loss from fire, theft, wind damage, water damage, etc. Few people understand that title insurance protects your ownership interest in your home against potential title hazards. In other words, title insurance insures that you have and maintain ownership of the home that you purchased.

There are two types of title insurance: (1) the mortgagee's or lender's title insurance and (2) owner's title insurance.

Typically as part of the loan, a lender will require a mortgagee's policy to issue the loan. The mortgagee's policy is based on the amount of the loan and protects the lender's interest in your home should a title problem arise that threatens the lender's lien against the home.

Owner's title insurance is issued in the amount of the purchase price of your home. You pay the entire premium at the time of closing, including the premium for the mortgagee's policy. Your title insurance protects you from title problems that arise that were not discovered during the title search (assuming that the title company did not except a certain issue from coverage). Title insurance typically also pays for legal fees involved in defending a claim to your title to your home.

Behind the Title Insurance Curtain

How does it work? A title company researches the public title records for documents that may affect or "cloud" the title to your home. Title companies may engage an attorney to assist in examining title, including providing a lawyer's title opinion. Title insurance companies put emphasis on risk elimination before insuring. This emphasis provides the best possible chance for avoiding a claim and loss. Examples of the kinds of documents that may cloud title or create a problem are:

  • Deeds or other legal documents that contain improper wording or incorrect names;
  • Outstanding deeds of trust (also called mortgages) and judgments, or other liens against the property;
  • Documents reflecting that the seller has not paid his/her taxes;
  • Easements that allow construction of a road or utility line and/or indicate certain lines, etc. beneath your property; or
  • Pending legal matters that might impact the property.

Prior to closing, the title company issues a commitment for title insurance. If the title search reveals a title problem, the title company will either refuse to issue a policy or will only issue a policy that does not cover losses caused by the problem, unless the problem can be cleared to the title company's satisfaction. In most cases, the title company and/or its attorney will work with the parties and/or their attorneys to resolve the problem before the title company issues your title insurance. Despite the efforts of the title company and/or its attorney to be thorough, hidden issues can emerge after closing and sometimes arise when you try to sell your home. Some examples of these issues include:

  • Someone forged a signature on a document, e.g., on a prior deed, which means that there was no actual transfer of ownership to you.
  • An unknown heir of a previous owner claims ownership of the property.
  • There is an expired or a fabricated power of attorney.
  • There is a simple mistake in the public records, e.g., an improper legal description.

Think of title insurance as a good investment to allow you to sleep better at night in "your" home.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.