Title Insurance Demystified

In my opinion, title insurance is an absolute necessity in every real estate conveyance transaction. The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement. Closing attorneys and title insurance companies need to do a better job explaining the excellent benefits and value of title insurance.

What Is Title Insurance?

Title insurance is policy of insurance (technically an indemnification policy) protecting homeowners and lenders from actual financial loss in the event that certain covered problems develop regarding the rights to ownership of property. While closing attorneys search and certify each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by most every public mortgage lender in the U.S., and are typically paid as part of closing costs. Owner’s policies are optional and paid for by home buyers. I will discuss owner’s policies in this post.

Title Defects: What Does An Owner’s Policy Of Title Insurance Cover?

The recent foreclosure paperwork mess and the Massachusetts high court ruling in U.S. Bank v. Ibanez is a perfect example of the importance of title insurance. Thousands titles in Massachusetts coming out of faulty foreclosures were rendered defective because of the ruling. Those without owner’s title insurance were left to fix the title problems on their own at great expense. Those with title insurance did not have their closings cancelled and were able to sell their property with the title insurer issuing “clean” policies over the defects.

Here are some other real world examples. I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Likewise, I represented a young family who was dismayed to learn that the property they were about to buy was subject to the claim of a long-lost heir of a prior owner. Fortunately for both clients, both properties were protected by title insurance which enabled the closings to go forward as scheduled, with the title company undertaking the obligation to discharge the mortgage, deal with the “missing” heir, and clear the title. If title insurance was not available in these transactions, the deals would have been canceled altogether. Or the closings would have been delayed by months if not years until the issues were resolved, if at all.

In addition to undischarged mortgages and the sudden appearance of unknown or missing heirs claiming an interest in the property, an owner’s policy of title insurance also covers well over 50 different title defects, including:

Faulty foreclosures
Forged deeds or impersonations
Incorrect legal or boundary descriptions
Recording errors

There is also a new extended or enhanced coverage policy available from all major title insurance companies which covers:

Building permit violations
Adverse possession or prescriptive easements
Building encroachments
Incorrect surveys
Pre-existing violations of subdivision, zoning laws, restrictive covenants.

For a full list of just about every conceivable situation covered by title insurance, please read my article: 50 Ways To Lose Your Home.

How Much Does Title Insurance Cost?

Title insurance is a one-time premium paid at closing and is calculated based on the purchase price of your home. The cost today is for s standard coverage policy $3.65 per $1,000 in home value. Enhanced coverage policies run about $4.00/thousand, and provide better coverages (i.e., for boundary disputes) and inflationary protection. Thus, a $500,000 home would cost a one time premium (standard) of $1,825.

Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. That is false. As a former claims counsel for a national title company, I could write a treatise on the different types of title problems I have seen derail closings and drag on for years.

The Role Of The Closing Attorney

The closing attorney ensures that the title examination is done on the property, certifies that the title is “marketable,” and issues the title insurance policy. While all U.S. public lenders require lender’s policies of title insurance, closings attorneys should always recommend owner’s policies for buyers. Attorneys do share in the title premiums generated. However, as I said before, even the most careful title search cannot reveal a hidden title defect that can wreck havoc on any subsequent sale or refinancing of the property.

To borrow from Nike’s old slogan, Title Insurance: Just Get It.

Please contact me at rvetstein@vetsteinlawgroup.com if you have any further questions about title insurance.

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missing heirs