Title Insurance for Homeowners
How is Title Insurance different than other Insurance?
The basic function of any type of insurance is to shift the risk of loss from one party to another, in exchange for a fee or premium. An automobile owner pays a premium to an insurance company to assume the risk of loss for any accident the owner might be involved in. Insurance companies survive by correctly calculating the balance between income and claims losses. Before any insurance company agrees to insure a party, the company performs a process of evaluating the level of risk. This process is generally called “underwriting “.
Title insurance companies insure owners and lenders against loss resulting from matters affecting the title to, or the ownership of, real estate. These companies examine the ownership history the real estate, any prior liens or mortgages and any other items affecting the ownership of or use of the real estate (such as easements, assignments, etc.) and charge an owner and/or a lender a premium to insure that there is nothing in that history that will result in a loss to the insured. Unlike other forms of insurance, title insurance relies on a single premium paid at the time of acquisition of the interest in the real estate.
A few of the most common risks title insurance protects against are:
A) Liens for unpaid property taxes, estate taxes, mortgages, mechanics liens, assessments
B) Forged instruments, false claims of ownership, false representations
C) Mistakes in recording legal documents
Usually, the real estate interests insured are fee simple ownership or a mortgage lien; however, any interest in real property can be insured, including such things as easements, leases, or even life estates. If a monetary loss results from a title defect or lien on the insured property, the title insurer will defend the insured against any attack on the title or pay the insured for the money lost up to the amount of the policy, provided the defect is not excluded within the coverage exceptions.
Learn more about why Title Insurance is critical to have.
Unlike other forms of insurance, title insurance is backward looking, instead of forward looking. Most insurance insures for future events or occurrences. Title insurance insures that at the time you buy the insurance, nothing has occurred to date that would cause issues in the future. If, after buying the real estate and the title insurance, the owner does anything to cause an issue, the insurance may not cover those future acts.
Owners of real estate and Mortgage lenders have different interests, and different insurance protections. When you finance real estate, the lender will require you to purchase a Lender’s Title Policy. That policy does not protect you, as the owner, in any way. You should purchase a separate Owner’s Title Policy at the time you buy the real estate, to make sure you have the protection you need.
The two most common title policies are the Owner’s Policy and the Lender’s Policy. The Owner’s Policy details the coverage as of the policy’s effective date and provides a litany of exclusions to coverage that the title company refuses to insure, known as Schedule B Exclusions. Typically, the policy limit is the purchase price of the property, and coverage lasts as long as the insured maintains the covered interest.
A Mortgagee’s Policy (or Lender’s Policy) insures the enforceability of the lender’s mortgage lien. Just as a lender will demand that the property has casualty and hazard insurance to protect the lender’s investment, the first lien holder also will require title insurance as security for its investment in the real estate, protecting against defects and liens. This protects all lenders up to the amount of their loans. Lenders do not want to be standing behind any other interest holder if they are trying to collect on their collateral. Title insurance for lenders makes sense as an investment, but it is also a legal requirement for many regulated mortgage lenders and has contributed to the proliferation of the secondary mortgage market in this country.
A one-time premium based on the value of your home is your only cost as long as you or your heirs own the property. There are no annual or monthly payments.