What is title insurance? Title insurance is in essence an insurance policy written in favor of a named beneficiary in order to protect the named beneficiary from defects that may arise in the chain of title. A chain of title is made up of ownership links that collectively represent the ownership of the property. When issuing a title insurance policy, an attorney reviews the chain of title to ensure that ownership as presented is an accurate representation and there are no title defects.
What is a title defect? A title defect is a legal right that makes the title “unmerchantable”. A merchantable title is one that is not suggestive to litigation. A title defect can arise in a numerous ways. Essentially, a title defect is any legal interest that has arisen from a legitimate owner at one time that was properly recorded or was not discovered in the title examination by an examiner.
Why is it important? The insurance policy acts as an umbrella to provide protection to the Lender from competing with the Buyer to seek repayment from the seller. Meaning, the loss suffered will only be suffered by you alone because the Lender’s interest is the only one protected.
Who does it protect? That depends on what policy is purchased. While there are two types of policies, Lenders and Owners, purchasers of traditional financing are forced to purchase title insurance naming the Lender as the beneficiary. Meaning, that the Lender is the protected party and you the Owner is not.
Can I get a title insurance policy to protect myself? Yes, for only a couple of hundred more dollars, an Owner’s policy can be issued naming the owner beneficiary. This will offer further protection and act to limit the losses one may sustain because of a defective title. Meaning, the loss sustained will be minimized because your interests were insured.
When and if a title insurance policy is not being purchased, what action should I take to protect myself? At the very least, a purchaser needs a Title Opinion from an attorney. Why? Well without one, the purchaser is essentially taking the seller at their word with no proof of ownership. So, without knowing who actually owns the property, the purchaser could be buying an encumbered property or worse no interest at all.