Who’s entitled to title insurance?

Castles in the Sand

As discussed last week, everyone needs homeowner’s insurance and an adequate amount. And of course, if you own a vehicle you need insurance on that as well. But what about this title insurance thing on your real estate? Do I need it, must I have it and what exactly does it insure?

When you purchase a property as a part of the closing procedure there will be a title search to verify you have clear title to the property. The title search reviews all the instruments, conveyances, public records and court proceedings to discover any material facts related to the title of a property. The search ensures that the “chain of title” is intact and that all liens, including mortgage liens, are satisfied at closing.

So, if everyone is doing their job why do we need title insurance? Nothing is perfect and there are many ways in which a clear title may not be so clear. Relatives of the previous owner, utility companies, government liens and contractors who may not have known about the sale of the property and did not have an opportunity to file a lien before the sale could all be given consideration after the sale. Even a simple misspelling could reveal a claim against the property.

Because of the unlikely but feasible event of one of these claims popping up after the sale, title insurance was invented in the mid-1800’s. It has since become the dominant method of protection for buyers and lenders and will pay for losses sustained by the new owner or their lender and will kick in to defend any ownership claims against the property.

If your home purchase involves a mortgage, virtually every lender will require you to purchase a title insurance policy just like requiring you to purchase a homeowner’s policy, so their interest is protected. This policy will protect the lender’s financial interest in your property as well as lender legal fees should that be required.

Some lenders also will require you to purchase an “owner’s policy” which you should do even if it’s not required. An owner’s policy is designed to protect the equity in your home as well as legal fees and other losses should the worst happen. For example, let’s assume the courts decide that a long-lost relative is, in fact, the house’s true owner. The lender’s policy will reimburse the lender for what you owe on the mortgage, but you’ll be out the amount of your down payment and other principal payments, not to mention that you will likely have to move out unless you purchased an owner’s policy. In addition, extended coverage policies are available for an additional cost if you and your legal advisor feel this is something you should purchase.

And like all things real estate there are exclusions and exceptions to the rules. A title insurance policy does not cover police power of the government such as zoning, building restrictions, setback requirements, and the rights of eminent domain (the power to take private property for public use by the state). Typically, it does not cover liens or encumbrances attaching to the property after the policy date.

Your attorney or closing agent working on behalf of an attorney will make the title search and title insurance less confusing at the closing table. It’s always important to be prepared beforehand so you know the right questions to ask and to make sure you’re purchasing the best possible insurance to protect your rights and money.

Bottom line, we’re all entitled to title insurance and we should all have it.

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