One of the single most expensive transactions someone may enter into in their personal lives is often the purchase of real estate. Because of the significant investment involved in a real estate transaction, purchasers and their lenders want to know their investment is safe when it comes to the title of the property or their lien priority. The buyers want to be sure that the correct seller is selling to them. The lenders want to be sure that there are no liens that have a superior interest to their interest. These are the matters that title insurance was designed to be used for. While title insurance does not guarantee that there are no adverse interests in the property, it is a contract of indemnity that can be issued in favor of an owner, lessee, lender or other holder of an estate, interest or lien on real estate. The policy agrees to protect the insured from actual loss because there was a superior interest in the property that was unknown at the time of closing.
What is a policy of indemnity? Indemnity means the title insurer agrees to insure against loss or damage related to the insured’s right in the property. If loss or damage occurs from a covered risk, compensation can be paid to the insured. This would include coverage against items such as other persons claiming an ownership interest in the property. It can also include defects or liens affecting the property that were otherwise not set out in the policy. Lender’s coverage insures the priority and validity of the lender’s lien against the property.
IS TITLE INSURANCE LIKE OTHER FORMS OF INSURANCE?
In short, no. With title insurance, the insured pays a one-time premium in return for indemnification up to the amount of the policy for covered risks. The policy remains effective as long as the insured owner, lender or its successors retain an interest in the property. The title insurance company is obligated to address claims covered under the policy.
HOW MUCH INSURANCE SHOULD SOMEONE PURCHASE?
In most resale transactions, the amount of the insurance purchased for owner’s coverage should be the sales price. If the purchaser is buying property that they are going to rehab or add improvements then the coverage should be an amount that covers the client’s investment in the property. For a loan policy, it is typically purchased in the amount of the loan.
OWNER’S TITLE INSURANCE v. LENDER’S TITLE INSURANCE
Most purchasers of a property do not understand why title insurance is important to them. Sometimes the purchaser will believe that the loan policy they are purchasing for the lender will take care of their coverage, too. It is important to note that title insurance only protects the insured under the policy. In a Loan Policy the insured party is the lender only. In order for the buyer to be protected an Owner’s Title Policy must be purchased.
ADVANTAGES TO TITLE INSURANCE – HOW DOES A REALTOR EXPLAIN TITLE INSURANCE?
There are many advantages with title insurance. One of the biggest benefits to a buyer is knowing that they have a policy to file a claim against for a covered risk they find out about after the closing. Also, in many cases the policy offers protection against legal costs and expenses in the event a lawsuit occurs. The title policy offers protection from unknown defects in the title to the real estate that occur because of fraud and forgery. Some good examples are:
· False impersonation of the true owner of the property
· Fraudulent or forged deeds, releases or wills
· Undisclosed or missing heirs
· Instruments executed under invalid or expired power of attorney
· Mistakes in recording legal documents
· Misinterpretations of wills
· Deeds by persons of unsound mind
· Deeds by minors
· Deeds by persons supposedly single, but in fact married
· Liens for unpaid estate, inheritance, income or gift taxes