Title insurance is one of those things that many people purchase and very few understand. The extent of most people's knowledge, even those who are involved in the real estate closing process, is frequently very limited and sometimes outright wrong! I thought I would try to give a brief overview of title insurance. I have practiced real estate law for many years, including working for lenders and for title insurance companies. My experience has entirely been in Connecticut real estate law, but much of this blog post will equally apply to other states.
The basic concept of title insurance is that it insures an interest in real property. To keep it simple, I will discuss loan (lender's or mortgagee) policies and owner's policies.
A loan policy or lender's policy insures the lender of a real estate mortgage. The policy identifies the mortgage which is being insured and states the name of the insured party, which is the lender (all part of Schedule A of the policy) and also states what items are excluded (called the exceptions) from coverage under the policy (which are stated on Schedule B of the policy). The policy in general terms insures that the mortgage is a valid lien on the real property identified in the policy subject only to those items stated as exceptions on Schedule B. The loan policy is almost always required by the lender whenever a mortgage loan is closed. It is paid for by the borrower as a closing cost. The policy premium is discounted when the loan is a refinance. The policy is issued in the amount of the insured loan. Title policies are supposed to reflect a concept of risk avoidance or risk elimination, by performing a title search, paying off prior liens, properly recording the new mortgage, etc. If all of these items are done properly, the need for the title insurance is in theory very low. The policy will also provide coverage against mistakes in the title search, mistakes in indexing, forgeries in the chain of title, and other hidden risks that even a proper title search will not uncover. Remember, the loan policy provides coverage to the lender, not the owner!
An owner's title policy is similar to the lender's. It too has a schedule A in which it identifies the insured (the purchaser) and a schedule B that lists exceptions (taxes, easements, covenants, other items of record). It also provides similar protection against forgeries, errors in the indexing, improperly paid off prior liens or mortgages, probate issues, etc. The biggest difference is that the owner is the insured and not the lender, so the title insurance company will owe its coverage obligations to the owner. The policy is issued in the amount of the purchase price and usually has an inflation increase rider so the coverage amount increased annually.
Why should you buy an owner's policy of title insurance when you purchase a property? Well for one thing in Connecticut the additional premium due for an owner's policy when you are already purchasing a loan policy is small. In a $200,000 purchase with a $160,000 loan for instance, the loan policy would be approximately $565.00. The owner's policy would be an additional $225.00. This is a one time charge at the time of closing and provides protections as long as, and even beyond, the time you own the property. So for a relatively small additional expense, you are purchasing a substantial amount of coverage. More importantly, it provides coverage against risks that can't really be eliminated, even by a diligent title search and having a competent attorney represent you at the closing. The best protection provided by the policy is one of defense of your title. If you are notified of a defect in the title (such as an unreleased mortgage) or there is a challenge to your title (a prior owner alleges the deed was forged) the title insurance company has an obligation to clear the title of the defect and to provide you with a legal defense of your title, which means that they are responsible for hiring an attorney to defend YOUR interest in the title.
Consider the recent panic over the robosigning and related foreclosure issues. I am sure that anyone who purchased a foreclosed property and purchased an owner's policy of title insurance was glad they had that protection!
If you have specific questions concerning title insurance in Connecticut, or how title insurance ispart of the closing process and closing costs in Connecticut, I would be happy to try to answer them.
Comments(3)