North American Title - Understanding title insurance

What is title insurance?
The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property. Title insurance protects both your interests and the interests of the lender, should a claim be made against your property. The Lender will require you to purchase Lender's Title Insurance, also known as a Loan Policy, to protect the Lender's investment in your mortgage. Owner's Title Insurance protects your investment for as long as you own your home. Title insurance offers protection against claims resulting from various defects (as set out in the policy) that may exist in the title to a piece of real property, effective on the issue date of the policy.

What is the difference between title insurance and casualty insurance?
Title insurers work to identify and eliminate risk before issuing a title insurance policy. Casualty insurance companies realize a certain number of losses will occur each year in a given category (auto, fire, etc.). The insurers then collect premiums monthly or annually from policy holders to establish reserve funds in order to pay for those expected losses.

Title companies work in a very different manner. Title insurance will compensate you for loss as defined by the terms of the policy, but title companies work in advance of issuing the policy to identify and eliminate potential risks, and therefore prevent losses caused by title defects that may have been created in the past. In fact, according to the American Land Title Association, more than 1/3 of all title searches reveal a problem that title professionals fix before you go to closing.

Title insurance also differs from casualty insurance in that the greatest part of the title insurance premium dollar goes towards risk elimination. Title companies maintain “title plants” that contain information regarding property transfers and liens reaching back many years. Maintaining these title plants, along with the searching and examining of title, is where most of the premium dollar goes.

Who needs title insurance?
Buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are invested in is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies.

What does title insurance insure?
As set out in the policy, title insurance offers protection against claims resulting from various defects. A defect can include a prior claim of ownership from someone other than the person selling you the property, for instance an ex-wife, a former partner or a co-inheritor. It could also include a claim for encroachment, for instance if a garage was incorrectly built partially on a neighbor's property. Another claim could result from a court judgment against the former owner that resulted in a lien placed on the property.

What types of policies are available?
Title companies routinely issue two types of policies. Owners Title Insurance insures the buyer for as long as the buyer and his/her heirs own the property. Lender's Title Insurance or a Loan Policy insures the priority of the lender’s security interest over the claims that others may have in the property.

What protections are provided with a title policy?
A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against the property that is covered under the policy. It also contains provisions for indemnification against losses that result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due as there are with other types of insurance.

What are the chances of ever making a claim against the policy?
In acquiring a policy, the policyholder is assured that recorded matters have been searched and examined so title insurance covering the property can be issued.

Because title insurance companies are risk eliminators, the probability of exercising the right to make a claim is very low. However, demands made against the property may not be valid, making the continuous protection of the policy all the more important. When a title company provides a legal defense against claims covered by the title insurance policy, the savings for that legal defense alone will greatly exceed the one-time premium.

The process of risk identification and elimination performed by the title companies, prior to the issuance of a title policy, benefits all parties in the property transaction. It minimizes the chances that adverse claims might be raised, and by doing so reduces the number of claims that need to be defended or satisfied. This process keeps costs and expenses down for the title company and maintains the traditionally low cost of title insurance.

Home Buyer & Seller