The home buying process is one long, complex transaction. Title Insurance is an important part of the real estate transaction since it insures you that all liens placed against the prior owners of the property, or documents that will restrict your use of the property, have been fully disclosed.
The most common form of ownership interest is 'fee simple' or 'fee,' which is also the highest form of interest an owner can have in real estate. You may also have to consider interests of third parties, such as easements granted by prior owners, which limit use of the property.
What is title insurance?
Title Insurance insures owners that they are acquiring marketable title to the property. Unlike casualty insurance policies which insure against future events, title insurance is designed to eliminate risk or loss caused by title defects from past events. Title insurance provides coverage only for title problems that were in existence at the time the policy was issued.
A title insurance policy is a contract of indemnity that guarantees that the title is as reported. If it isn't, and the owner is damaged at a later date, the title policy covers the insured for loss up to the face amount of the policy.
What is a title search?
Issuing a title insurance policy is an extensive and exacting process. Title insurance companies work to eliminate risks by performing a painstaking search of the public records, or the title company's own "plant", where public records, laws, and court decisions pertaining to the property and the parties to the escrow are maintained. This is done to determine the current recorded ownership, recorded liens or encumbrances, and other matters of record which could affect the title to the property.
What is covered?
Not all risks can be eliminated by a title search, since certain "hidden defects", such as forgeries, identity of persons, incapacity, incompetency, and failure to comply with the law, cannot be disclosed by an examination of the public records.
In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense for future claims against the property.
Extended owners' and lenders' policies of title insurance provide broader coverage and are available through the American Land Title Association (ALTA). Coverage is extended to certain matters that are "off-record", but which are generally discoverable by an inspection of the property or by questioning the parties in possession. These include:
- Unrecorded liens and encumbrances
- Unrecorded easements
- Unrecorded rights of parties in possession
- Encroachments, discrepancies, or conflicts in the boundary lines
ALTA policies are available for owners and lenders, and a "plain language" ALTA Residential Policy is also available for residential property containing one to four units.
Agents, buyers, and sellers should not assume that all title insurance policies and title companies are the same. They aren't, and it is important to ask questions of your title company to determine the type and cost of coverage available.