Title insurance is basically a contract in which the insurance company (Insurer) agrees to indemnify, or compensate, the insured(s) (aka buyer, lender, or both) for financial losses sustained because of:
- Mistakes or forgeries in wills, mortgages, or title documents relating to the property
- Allegations that a past owner or co-owner did not consent to the conveyance, perhaps due to an undisclosed divorce, commission of fraud, or an error during the probate of an estate
- Defects made in the required transfer or conveyance documents, or
- Liens or encumbrances on the real property, (i.e., based on past debts for taxes, contractor’s work, or child support obligations)
NOTE that this type of insurance relates to past NOT future events.
The lender’s policy protects against situations where the mortgage is unenforceable against the borrower (buyer) because you do not, in fact, have legal title to the home (perhaps due to one of the reasons listed above). In such a case, the title insurer might have to pay the bank for its loss on the mortgage.
Perhaps a neighbor claims, and proves, he purchased several feet of what you believe to be your property from a previous seller several years before the sale and recorded a deed, the title insurer would have to pay you for your loss if it failed to discover this prior to your closing.
Step One: The Preliminary Title Report is Issued
Once your contract is received and opened, we begin to investigate the public records in the recorder’s office of the county in which the property is located. We are looking for documents that affect title to the land, such as deeds and liens.
A preliminary report is issued which details the liens, easements, or other encumbrances on the land. These “issues” are included as either Requirements or Exceptions to the coverage as of the date of the exam. A Requirement is an item that must be noted or cleared prior to the closing date of your sale. An Exception is and item not insured against loss. This preliminary report does not provide coverage. It simply offers coverage, listing the various ownership interests in the land and what items will be excepted from coverage were you to close as of the date of the exam, were you to accept it.
Step Two: The Title Company Issues a Commitment
A Commitment is a time-delimited agreement by a title insurer to issue a title insurance policy to you to cover your property to sell you a policy for a specified premium.
Almost always, the commitment will contain conditions that have to be met in order for the insurance to go into, and remain, in effect and exceptions to coverage (a list of items that will not be covered by the policy).
Examples of typical conditions are:
- Payment of the Seller’s mortgage(s)
- Payment of all liens against the property and all taxes owed at the time of the sale, and
- Issuance of a valid deed transferring ownership of the property to the buyer/insured
Some exceptions that are commonly listed include:
- Restrictions, conditions, and covenants (CC&Rs) that were revealed in the public records. CC&Rs are common in new subdivisions and typically restrict uses of the land, such as what color a house can be painted and how many cars can be parked in the driveway, and
- Any claims, liens, and encumbrances against the property that were not part of the public records at the time of the title search.
Assuming you accept the terms of the Commitment, you will pay the premium and title insurance will go into effect on the date of the close of escrow and transfer of ownership.
Get an Owner’s Title Insurance Policy
In almost all cases where a buyer takes a mortgage, the lender requires that the buyer pay for the lender’s title insurance policy that protects the bank against title defects. This policy does NOT cover the buyer in any way. Only the owner’s title policy will protect the buyer.
“Fraud and undisclosed claims to ownership of a home, or to be owed money with the home as collateral, are not as uncommon as one might think.”