Title Insurance

The most common and accepted method of obtaining an evidence of title, and assurances to its marketability, is now the title insurance. Title insurance has actually been around since shortly after the Civil War (late 1800s).

The first title insurance policies were actually provided by abstractors. As the role of abstractors expanded, they began to answer the need for more assurances to the buyer that he or she was receiving clear and marketable title to the desired property. So abstractors would have their attorneys analyze the abstract report, render a legal opinion as to its validity and then issue a title insurance policy to protect the owner against hidden risks, such as the following:

  • Forgery. Legally recorded documents may actually be forgeries. Although they are invalid, they will remain on the property's title until they are removed through legal process.
  • Unqualified grantor. The grantor or assignor may be unqualified to execute the recorded deed. The deed or recorded document is therefore invalid and subject to removal from the title.
  • Spousal rights. An incorrect marital status indicated on a deed or release may later hamper a deed or release, because dower and curtesy rights may create an encumbrance on the title.
  • Defective deeds. Some recorded deeds may be invalid because of improper delivery or recording. For example, Bagwell signs a quitclaim deed to Natasha, but Natasha does not record the deed. Bagwell meanwhile has a mortgage on the property that goes into foreclosure. The lender forecloses the property and gains the title to the property. Natasha records the quitclaim deed after the foreclosure, but her deed will be invalid.

Title insurance companies soon grew to replace abstract companies, in providing title abstract and insurance protection. Over the decades, the title insurance industry continued to develop and provide a wider array of protection for its policyholders. Soon, the American Land Title Association (ALTA) was formed to provide national benchmarks and standards for its member title insurers.

Like all insurance policies, the title insurance policy is an agreement between the insurer and the policyholder. The insurer will defend the policyholder against lawsuits based on title defects covered by the insurance policy. The title insurance policy essentially covers the title examination and certification performed by the title insurance company. The covered defects must arise from issues or title elements that were in existence prior to the issuance of the coverage.

Most insurance policies will list exceptions and conditions to its coverage. title insurance is no exception. Title insurers will still issue a policy, even if the title has encumbrances . However, those encumbrances will be listed as conditions to the coverage. Other typical conditions include encroachments, easements and other issues that would be revealed by a survey, when no survey has been provided to the title insurer. Also, the title insurer cannot provide full protection against unrecorded claims or rights to the property by other people.

Unlike standard insurance policies, title insurance is not limited to a specified period. The policy coverage is often good for the entire period of ownership. There are actually several types of title insurance policies available:

  1. Owner's policy
  2. Lender policy
  3. Residential policy
  4. Endorsements
  5. Leasehold policy

Owner's policy

Most real estate transactions require a basic owner's policy. The one-time premium is paid, usually by the seller or grantor, at the time of the sales transaction. The policy remains in force until the policy-holding owner sells the property.

Lender policy

When mortgage financing is involved, with either purchases or refinances, a lender's title policy is normally required. The one-time premium is paid at the closing. But unlike the owner's policy, the lender's policy does have a limited lifetime. The policy remains in force only until the loan principal is paid off. However, if the loan is foreclosed, the policy continues.

Residential policy

Current ALTA insurers now offer a special type of coverage for homeowners. This residential policy offers a dramatically more expansive coverage:

  • Unrecorded liabilities. This new policy protects the homeowner against encroachments, easements, unrecorded liens and other issues normally not covered by the typical policy.
  • Inflation protection. The new residential policy will increase its coverage protection by ten percent (10%) annually for the first five years, so that the policy coverage could provide some remedy for inflation. Obviously, this would assume that inflation does not go into hyperinflationary mode.
  • Actual loss coverage. Insurers will now reimburse homeowners if they are forced to remove or move portions (or all) of their home because of building code violations, encroachments or zoning issues.
  • Inability to use. If the homeowner is unable to use the property because of a claim against the title or use it as a single-family home because of contradictions with recorded restrictions or zoning laws, the title insurer will cover the loss.

Endorsements

In addition to the basic policy, ALTA title insurers also offer additional endorsements (or riders) to the policy. There are endorsements available for encroachments, zoning issues, restrictions, environmental issues and site location.

Leasehold policy

Tenants are similar to buyers in that property is conveyed to them, albeit on a temporary basis. Tenants of larger properties or more substantial leases have a vested interest in ensuring the property's title will not present problems that may jeopardize their use of the leased property. Leasehold policies are designed especially for tenants. For more information, see the "All About Leases" article.

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