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Introduction
The previous chapter examined the chain of title and explained how lawyers, title examiners, lenders, and title companies review the public land records to determine ownership and identify recorded defects affecting real property.
Even the most thorough title examination, however, cannot eliminate every risk.
Some title defects cannot reasonably be discovered before closing. Forged deeds, undisclosed heirs, recording mistakes, fraud, clerical errors, and certain hidden liens may remain unknown until after the property has been purchased.
Title insurance exists to help manage those risks.
Unlike most forms of insurance, which generally protect against future events, title insurance primarily protects against certain covered defects that already existed before the policy was issued but were not discovered during the title examination. (Legal Information Institute)
What Is Title Insurance?
Title insurance is an indemnity insurance policy that protects the insured against certain covered financial losses resulting from defects in title existing on or before the policy's effective date.
Before issuing a policy, the title company ordinarily performs a title examination by reviewing the public land records. If acceptable under the company's underwriting standards, it issues a title insurance policy covering specified risks, subject to the policy's terms, exclusions, exceptions, and conditions.
Unlike automobile or homeowners insurance, title insurance generally does not insure against future accidents or future property damage.
Instead, it primarily protects against previously existing title problems that were unknown at the time of closing. (Legal Information Institute)
| Insurance Type | Primary Risk Covered |
|---|---|
| Homeowners Insurance | Future physical damage or liability |
| Automobile Insurance | Future accidents and liability |
| Title Insurance | Certain covered defects existing before the policy date |
Why Title Insurance Exists
The public land records greatly reduce uncertainty, but they cannot eliminate every title problem.
Examples of hidden defects include:
- forged deeds;
- fraudulent conveyances;
- undisclosed heirs;
- recording or indexing errors;
- clerical mistakes;
- defective acknowledgments;
- unknown liens;
- mistakes in legal descriptions;
- errors in examining public records.
Some of these defects may remain undiscovered until years after the purchase, when ownership is challenged or the property is sold. Title insurance is designed to help protect against covered losses arising from these types of previously existing defects. (Legal Information Institute)
The Title Examination Process
Before issuing a title insurance policy, a title company generally conducts a title examination.
The examination commonly includes:
- reviewing the chain of title;
- examining recorded deeds;
- identifying mortgages and releases;
- reviewing easements and restrictive covenants;
- searching for recorded judgments and liens;
- identifying defects requiring correction before closing.
If problems are discovered, the title company may require corrective action before it will issue a policy. (Legal Information Institute)
Title Commitments
Before closing, the title company ordinarily issues a title commitment (sometimes called a title binder).
The commitment is not the insurance policy itself.
Instead, it is a preliminary statement describing the conditions under which the insurer is willing to issue the policy.
A typical commitment identifies:
- the proposed insured;
- the estate or interest to be insured;
- requirements that must be satisfied before closing;
- exceptions that will remain outside the policy's coverage.
Carefully reviewing the commitment is an important part of the closing process because it identifies matters that must be resolved and risks that may remain excluded from coverage. (Legal Information Institute)
Owner's Policy vs. Lender's Policy
Title insurance policies protect different interests depending upon the insured.
Owner's Policy
An owner's policy protects the purchaser's ownership interest against certain covered title defects.
If a covered defect later results in financial loss, the policy may provide protection according to its terms and limits.
An owner's policy generally remains in effect as long as the insured retains an ownership interest in the property.
Lender's Policy
A lender's policy protects the mortgage lender—not the homeowner.
Most institutional mortgage lenders require a lender's policy as a condition of financing.
The lender's policy protects the lender's security interest in the property and generally remains in effect until the loan is paid, refinanced, or otherwise terminated. It does not insure the homeowner's equity or ownership interest. (Legal Information Institute)
| Feature | Owner's Policy | Lender's Policy |
|---|---|---|
| Protects | Property owner | Mortgage lender |
| Coverage Amount | Generally based on purchase price | Generally based on loan amount |
| Duration | Generally while ownership interest continues | Generally until the loan is satisfied or terminated |
| Usually Required by Lender | No | Yes |
What Title Insurance Generally Covers
Coverage depends upon the specific policy issued, but title insurance commonly protects against certain covered losses arising from:
- forged documents;
- fraud;
- undiscovered recorded defects;
- unknown heirs;
- certain recording mistakes;
- certain defects in execution;
- certain unknown liens or encumbrances existing before the policy date.
Coverage always depends upon the actual policy language and applicable law. (Legal Information Institute)
Common Exclusions and Exceptions
Title insurance does not insure against every possible title problem.
Policies commonly contain:
Exclusions
These remove entire categories of risks from coverage under the policy.
Exceptions
These identify specific matters affecting the property that will not be insured.
Examples may include:
- recorded easements;
- restrictive covenants;
- utility rights-of-way;
- matters disclosed by survey;
- governmental regulations affecting land use.
Buyers should carefully review both exclusions and exceptions before closing because they define the scope of coverage. (Legal Information Institute)
Title Claims
If an insured discovers a potential covered defect after closing, the policyholder generally provides notice to the title insurer.
The insurer will then determine:
- whether the claim falls within the policy;
- whether coverage applies;
- what obligations exist under the policy.
Depending upon the circumstances and policy language, the insurer may:
- defend the insured's title;
- attempt to cure the defect;
- negotiate a settlement;
- compensate the insured for covered losses.
The insurer's obligations are governed by the insurance contract itself. (Legal Information Institute)
Practical Examples
Common Misconceptions
"Title Insurance Guarantees Perfect Title"
Incorrect. Title insurance protects against certain covered defects. It does not guarantee that no title problems will ever arise.
"A Title Search Is the Same as Title Insurance"
Incorrect. A title examination investigates the public records. Title insurance is the insurance policy issued after that examination, subject to its terms and limitations.
"The Lender's Policy Protects Me"
Generally, no. A lender's policy protects the lender's security interest. To protect the purchaser's ownership interest, an owner's policy is generally required. (Legal Information Institute)
Relationship to Other Property Doctrines
Title insurance operates within the broader framework of property law and the public land records.
| Doctrine | Relationship to Title Insurance |
|---|---|
| Chain of Title | Forms the basis of the title examination |
| Recording Acts | Determine notice and priority issues examined before issuance |
| Deeds | Establish ownership being insured |
| Mortgages | Lender's policies commonly protect mortgage security interests |
| Quiet Title | May be necessary to resolve disputes before or after a claim |
Key Takeaways
- Title insurance protects against certain covered defects in title that existed before the policy was issued but were not discovered during the title examination.
- Title insurance differs from most insurance because it primarily protects against existing risks rather than future events.
- An owner's policy protects the purchaser's ownership interest, while a lender's policy protects the mortgage lender's security interest.
- Coverage depends on the policy's terms, exclusions, and exceptions.
- Title insurance complements—but does not replace—a careful title examination and the public recording system. (Legal Information Institute)
Continue Your Reading
Next Chapter — Mortgages
The next chapter begins the study of real estate finance by examining mortgages—the principal security instrument used to secure repayment of loans with real property. Readers will learn the legal relationship between the promissory note and the mortgage, the rights and obligations of borrowers and lenders, the creation and perfection of mortgage liens, and the role mortgages play in modern real estate transactions before later chapters examine assignments, servicing, defaults, and foreclosure. (Legal Information Institute)