When someone buys a home, in addition
to the land, bricks, and wood, the buyer receives the legal title to the property.
If the title is defective, it could interfere with enjoyment of the property
and result in financial loss. When title insurance is purchased by a property
owner, the insurer guarantees that the owner has clear title to the property,
free of claims or encumbrances.
Title insurance begins with a search
of land records tracing the property's chain of title back in time through previous
owners. A title search should reveal any legal documents that do not clearly
pass title, such as where incorrect names or notary acknowledgments appear,
as well as outstanding mortgages, judgments, or tax liens. Even a thorough search
by an experienced title examiner cannot be absolutely certain to detect every
problem, however. Title insurance protects against the unseen hazards that may
not surface until long after property is purchased. Some of the risks against
which title insurance gives protection include: a forged deed that transfers
no title to the property; previously undisclosed heirs with claims against the
property; and a legal document executed under an invalid or expired power of
attorney.
A title insurance policy protects
the insured party, such as the home buyer or the buyer's mortgage lender, against
losses suffered if the title is found to be defective, even after a search of
land records suggests no problems. Lenders' title insurance decreases and eventually
is discontinued as the loan is paid off. Owners' title insurance, issued in
the amount of the purchase price, lasts as long as the insured has an interest
in the property.
As with any other insurance policy,
the fine print in a title insurance policy must be examined with care. Typically,
there are exclusions or exceptions from coverage. For example, the effects of
governmental laws, ordinances, and regulations are generally excluded. You also
should be aware of two other common policy provisions. The first is a standard
arbitration clause, requiring binding arbitration to resolve any dispute under
a specified dollar limit. The second provision, a co‑insurance clause,
states that the owner must obtain increased coverage if the insured property
is improved in order to furnish the same level of protection.
Title insurance protection takes
various forms. The insurer will negotiate with third parties about their claims
against the insured property, pay for defending against an attack on the title,
and pay claims if necessary. Title insurance also helps to make sure that a
dream home will not become a legal nightmare for the home buyer.
