The protections afforded by title insurance are essential to closing any real estate transaction in a way that leaves all parties with peace of mind. But while buyers and sellers may be aware of title insurance, fewer people have a complete understanding of how this specific type of insurance actually benefits the policyholder.
As a result, many real estate brokers, attorneys, and title agents often get questions from their clients along the lines of:
“What does my title insurance policy actually protect me against?”
What Is Title Insurance, and Why Is It Important?
There are two types of title insurance: lender’s title insurance, also called the lender’s policy, and owner’s title insurance, or the owner’s policy.
Title insurance guarantees that the interests of both the buyer and the lender are protected against common title search mistakes or unknown clouds on a property’s title.
Owner’s title insurance protects against financial losses that might occur when title is subject to liens, encumbrances, and defects that were unknown to the buyer and seller on the effective date of the title policy. Lender’s title insurance is similar, but protects against claims that might jeopardize the lender’s priority as a creditor in the event of a foreclosure or other forced sale of the property.
Without owner’s title insurance, no buyer could ever be totally sure that their substantial investment in a new piece of property is protected. Very few people would invest their family’s wealth into an asset knowing that, at any point, the long-lost heir of a former owner might step forward to invalidate their ownership.
Likewise, lenders would be reticent to offer a mortgage knowing that there are other parties with a security interest in the property. The lender’s title insurance policy ensures that a lender’s priority as a creditor is protected for the lifetime of the loan.
Items Typically Covered By Title Insurance
In short, owner’s title insurance is designed to protect the policyholder in the event that some person or party says they have a claim against the home from before it changed hands.
The specific protections afforded by a title insurance policy will vary from policy to policy, and purchasers are encouraged to carefully review the details of any policy with their title agent before completing the sale.
With that said, most policies can be expected to offer protections against losses and legal fees stemming from common title defects such as:
- Fraud, including forgery, undue influence, duress, incapacity, or impersonation
- Failure of earlier sellers to properly convey title
- Clerical errors, including electronic filing errors
- Defective judicial or administrative proceedings that result in claims against the property
- Undisclosed tax liens due and payable at the time of sale
- Physical encroachments that would have been disclosed by an accurate survey of the land
- Unmarketable title, or title that is defective and unable to be transferred
- A lack of access to the property
- Probate issues, such as conflicting wills or undiscovered heirs
- Fraudulent or erroneous transfers in bankruptcy proceedings
These defects are, generally speaking, items that should have been discovered in a title search and property survey, but which were not discovered and corrected before closing through no fault of the seller or purchaser.
Unlike homeowner’s insurance, which protects against future claims for damage or repair, a title insurance policy is backward-looking; it protects against claims that existed at the time of the sale but which, due to imperfect record-keeping, unavoidable error, or a failure of due diligence, were not discovered even in a thorough title search and escrow process.
Title Insurance Exceptions
Title insurance does not cover every potential defect, and in fact policies will generally contain explicit limitations. Understanding what is excluded from your title insurance policy can be almost as important as understanding what is covered. Every policy is different, but most title policies will exclude:
- Any actions by the local, state, or federal governments that are not reflected in the available public records
- Any liens or encumbrances that the purchaser is aware of at the time of sale,
- Liens for any taxes that are currently accrued but not yet paid
- Items specifically enumerated that are specific to the property — for example, an access or utility easement the parties are aware of at the time of sale
Most significantly in this list, title insurance does not cover every possible action by government against the property — for example, the insurance policy would not cover against an eminent domain action by a state or local government, even if the action was initiated prior to the transfer, if the action is not reflected in the public record.
Similarly, the insurance policy will exclude any encumbrances that the purchaser is made aware of, if all parties choose to move forward with an awareness of the risk. This situation most frequently occurs in cash transactions, as it is rare for a lender to provide financing on an encumbered property.
Finally, some easements or encroachments onto the property may be excluded. For example, public utility easements provide for a limited use of property for gas lines, electrical lines, telephone lines, cable lines, sewers, or any other items that contribute to the common good. These excluded encroachments or easements are generally listed with specificity in an amendment or appendix to the policy itself, and will vary from property to property.
What Happens If I Make A Claim?
If a claim arises, the title insurer will reimburse you or your lender for losses that are covered, up to the face amount of the policy, and for any related legal expenses. This protection is effective as of the issue date of the policy. Claims may not arise for months or even years after a purchase, so proceeding with a reputable title insurance provider is critically important.
Who Purchases The Title Insurance Policy?
Which party pays for the policy is a matter of custom and practice and not set by law. In Illinois and Wisconsin, the seller generally pays for the owner’s policy, and the buyer pays for the lender’s policy. However, the parties are free to negotiate a different allocation of fees based on the structure of the deal. Your title company or escrow company can advise you as to who normally pays the premium in your area. Lender’s title insurance is based on the amount of the loan. Owner’s title insurance should be based on the purchase price of the property.
The choice of which title insurer to use belongs to the person who pays for the policy. The federal Real Estate Settlement Procedures Act (RESPA) of 1974 (Public Law 93-533), prohibits any party to the transaction from requiring any other party to purchase title insurance from any particular company. The federal Consumer Financial Protection Bureau provides additional information on RESPA and title insurance.
Learn More With Your Trusted Title Insurance Company
Protecting your interests and assets during a home purchase with title insurance may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of owner’s and lender’s title insurance policies alone.
If you have questions about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.