There are so many types of insurance products out there that it's sometimes hard to determine what they actually are, why it may be important to purchase them, when they are actually available and to whom they are made available. Let’s review some definitions and provide an illustration to help explain title insurance.
Let’s start with the basics. What is legal title? In real property law and in very broad terms, legal title is the formal right of ownership to a property. So when you purchase a house, you are purchasing more than the structure and the land that it sits on. You are also purchasing the house's legal history which is identified through the title.
What is real property? Real property is land and generally whatever is erected or growing upon or affixed to land.* Or in more simple terms, it is fixed or immovable property (usually buildings and structures) and/or land.
What is title insurance? Title insurance is a form of indemnity insurance predominantly found in the United States. It insures or protects against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Unlike other types of insurance (like car insurance), title insurance insures against title defects that occurred prior to the title policy date.
What is the difference between a title search and title insurance? A title search provides a report of public record findings regarding real property. Such findings may include different types of deeds, liens and other legal interests. A title search itself does not provide any insurance. However, title insurance is not a substitute for a title search. They complement each other. A title insurance company will not issue a title insurance policy unless and until all of the title issues found during the title search are resolved or “cleared.”
What does title insurance protect against? When you purchase title insurance, the title insurance company reviews the legal history of the property (through a title search) and insures that nothing in its legal history of the title will result in a loss to the insured.
Title issues a title policy insures against include title defects, invalidity or unenforceability of the mortgage lien, just to name a few. Title insurance also insures against title issues for non-recorded items such as fraud, forgery, or missing heirs. It also enables mortgage lenders to sell their loans on the secondary mortgage market. Remember title insurance covers title issues retrospectively (or prior to the title insurance policy date).
Through title insurance, the title insurer agrees to reimburse the policy holder up to a specified amount for an actual, sustained loss. However, it is important to note that not all types of title insurance insure the property owner from loss. That is because there are two different types that come into play with residential real estate.
What are the different types of title insurance policies? There are two types: the Mortgagee Policy and the Owner Policy.
The Mortgagee Title Insurance Policy (“Mortgagee Policy”): The Mortgagee Policy is required by most mortgage lenders. This type of policy is put in the lender's name, making the lender the insured. It is required by mortgage lenders to insure the validity of the mortgage as a lien on your property.
I can't say it enough- This type of policy protects the lender. It does not protect the homeowner. It also just insures for the value of the mortgage, not the full purchase price for the property.
The Owner Title Insurance Policy (“Owners Policy”): The Owners Policy is a separate and additional policy that must be purchased by owners who want to protect their interest in the real property they purchase. Unlike a Mortgagee Policy, an Owner Policy covers the value of an owner's interest in the property, not just the value of the loan. So it covers the purchase price for the property.
For example, let's say that the value of the property you are purchasing is $200,000 and you are mortgaging $160,000 and paying $40,000 in cash. A Mortgagee Policy would only protect the lender (the “mortgagee”) for the value of the mortgage, here $160,000. An Owner Policy would protect for the owner/purchaser for the full value of property, here $200,000.
Only an attorney who is an agent of the title insurance company can issue title insurance policies (through a “Certificate of Title”).
Both Mortgagee Policies and Owner Policies can only be purchased at the time the real property is purchased (the “real estate closing”). They can only be purchased by the buyer of the real property. Remember the loan/mortgage company requires the purchaser to purchase a Mortgagee Policy on behalf of the loan/mortgage company.
It is also important to note that both Mortgagee Policies and Owner Policies cover the costs, attorney’s fees and expenses incurred to defend a title in accordance with the title insurance policies terms. Because an Owner Policy provides more coverage, an Owner Policy pays up to the original purchase price (plus as much as 50% if the policy also has an inflation rider).
As a final note, it is important to mention that there are two types of Owner Title Insurance Policies: a standard policy and an expanded policy. These are not discussed at length in this blog. I will be happy to review with you the differences in coverage provided by both of these policies as well as provide a price quote for any of these types of title insurance policies should you want me to represent you at your real estate closing. If you have any questions, I can be reached at 860-295-1600.
*Black’s Law Dictionary, Sixth Edition.
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