Title insurance is quite different than most other types of insurance in
terms of the type of risk that it covers. Most insurance, such as homeowners
(property) insurance, protects the policy holder from risks in the future,
such as fire or storm damage. Title insurance provides coverage
for past problems or errors in the chain of title to the property, such as
missing or forged signatures, missing discharges, probate issues and a host
of other problems. Buyers sometimes view title insurance as unnecessary
because the events that are being insured have already occurred. The most
common query is - "if there's a problem with the title, why are we closing?"
There are two separate forms of title insurance - one form that
protects the mortgage lender and the other that protects the new owner. In
most transactions, where there is a mortgage lender, the lender will require
a policy of title insurance to protect their loan (the "Loan Policy"). The
buyer pays the premium as part of the closing costs for the transaction. A
buyer has the option of purchasing a similar policy of protection for their
own interest (the "Owner's Policy"). The Owner's policy requires an
additional premium to be paid, but offers coverage in a greater amount and
for the buyer's direct benefit.
In answering the hypothetical buyer's question, "why would the closing go
forward if there was a problem with the title?" the simple answer is that
title insurance protects against unknown past problems. Most title claims
involve problems or disputes that existed at the time the property was
purchased, but were uncovered in the future.
* Possible Hidden Risks that may be protected against include:
* Forgery
* Fraud in connection with the execution of documents
* Unsatisfied claims not shown on the record
* Incorrect indexing at registries of deeds
* Conveyance of a minor
* Clerical errors in recording documents
* Improperly discharged mortgages, or undischarged mortgages
If an owner who purchased title insurance discovers a defect or dispute
(usually this is discovered when a new title examination is performed in
connection with a sale) the policy gives two critical protections. First,
the insurance company will hire a real estate lawyer at their sole expense
to determine whether the dispute is really a title defect. An uninsured
owner, however, would have to pay their own attorney. Second, if the issue
truly represents a defect in title that is, in fact covered by the policy,
then the title insurance policy will assure that the transaction goes
forward.
Title insurance premiums are based on the value of the real estate at the
time of the purchase. The premium for title insurance is paid once, at the
closing, and is then effective for the entire time the buyer owns the
property without the need to renew.
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