TITLE INSURANCE:

WHAT IS IT AND WHAT SHOULD YOU KNOW?

When you buy or refinance real estate, you will likely hear about title insurance. In this article, we explain what title insurance is and why it matters.

Title insurance protects owners and lenders from financial loss caused by problems in a property’s legal title. Unlike health or auto insurance, which cover future events, title insurance deals with existing (but often unknown) risks.

The most common title insurance products are loan policies and owner’s policies. Loan policies protect the lender’s interest. You will likely be required to purchase a loan policy when you finance real estate. Keep in mind, however, that the loan policy does not cover your interest in the property – to obtain that protection, you must purchase an owner’s policy.

Defects covered by title insurance include things like paid but unreleased liens and improperly executed documents. If a covered defect arises, the insurer will either fix it or reimburse you for the loss, up to the policy limit.

Before a policy is issued, the title company prepares a commitment. The commitment lists (1) things you must do before the title company will insure title, and (2) exceptions, which are matters that the policy will not cover. You should review the commitment carefully and consult a real estate attorney if you have questions about it. Some title agents are lawyers, but they do not represent any party in a transaction and cannot offer legal advice in their role as title agent.

Exceptions may be harmless or even helpful (such as most public utility easements) or objectionable to you but not fatal (such as some use restrictions). Other exceptions, like unpaid liens or pending lawsuits, are almost always problematic, and the title company will require them to be released before they will insure title.

Although title insurance provides important protection, a title insurance policy will not cover matters that are listed as exceptions to coverage in the policy, matters that are not exceptions but that you know about prior to the policy date (for example, an unrecorded lease), or matters that are created after the policy date (for example, a future mortgage).

Title insurance is a one-time purchase that protects owners and lenders from hidden title problems. Make sure you understand which type of policy you are paying for, review the commitment carefully, and work with your attorney and the title company to clear any exceptions to coverage that could adversely impact your investment in the property.

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