Title insurance is a special type of insurance that protects the insured from financial loss relating to problems with title to real estate. These title problems include:
• There are unpaid mortgages or liens, property tax liens or other tax-related issues – all of which give creditors or tax authorities the right to seize or foreclose on the property property in a foreclosure proceeding;
• The transferor did not own the property that they conveyed;
• The transferor owned the property at one time, but has already conveyed some or all of the property;
• There are gaps in the prior chain of title, such as probate not being completed.
Title insurance allows both buyer and seller to shift the risk of loss to the insurance company, so that, if a lawsuit arises due to any of these issues, the title insurance company will defend the lawsuit and, if the title insurance company loses the lawsuit, pay any claims relating to the lawsuit.
How Title Insurance Works Before issuing a title policy, title insurance companies will search the public records to verify that all prior conveyances of the property are in order. This process is known as verifying the chain of title, which also verifies that the correct property is being transferred. Improper legal descriptions can raise questions about property ownership, so to can any recorded encumbrances such as liens, default mortgage payments etc. The abstractor will also look for evidence of any recorded encumbrances on real estate.
After examining the chain of title, a title agent will then review the findings and write a title policy on the property. There are two main types of title policies: • Owner’s Policy – Insures that the owner has title to the property and that the title is free from any liens or encumbrances other than those listed in the title policy. • Lender’s Policy – Insures the lender against any title issues that would affect the lender’s collateral in the property.
For each type, the policy will insure title as to anything other than the exceptions to title listed in the insurance contract.