A policy, issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.
Title insurance companies historically have not marketed extensively to the general public. Homebuyers should, prior to closing, explore the issue of title insurance and other closing costs with their attorney, real estate broker and loan officer.
In the event that the insured owner suffers monetary loss, due to a title defect, lien or other matter of public record created prior to the effective date of the policy, the title insurer will defend the insured against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.
Title insurance differs in several respects from other types of insurance. Where most insurance is the contractual "coverage" where one party indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property.
Any issues found are either fixed before issuing the title policy or the coverage is specifically written to exclude those items. Title insurers typically pay a very low percentage of their premium revenue out in claims in a given year; industry averages are 5 to 10%.
There are two basic kinds of title insurance:
It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party), if the property is found to belong to someone else, if there is no access to the land, or if there is some other defect or lien on the title. The amount of the Owner's policy is typically the purchase price. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.
The lender's policy protects the lender for the amount of money lent against the property. As the loan is paid down, the amount of coverage decreases, and once the loan is paid off, coverage under the policy terminates.