Title insurance is a form of indemnity insurance for real property (land and improvements) offering both buyers and lenders insurance against loss arising from defects or unmarketability of title. Examples of defects or unmarketability include matters such as outstanding liens, errors in property’s legal description, or gaps in ownership – all being things a buyer or lender should be concerned with.
Title insurance differs from other forms of insurance in two major ways. First, title insurance is not casualty based. An underwriter or agent will perform a search of the underlying lands to identify the owner, outstanding liens and any other matters that affect the real property. A title commitment will be created based upon the results of this title search. A title commitment details the property’s owner and legal description, requirements which must be satisfied in order to provide coverage (including releases of mortgage, judgments or other matters that cloud the title) and matters that will be excepted from coverage (such as easements, restrictions and other matters that run with the land). This differs from casualty insurance which is typically provided without any due diligence (i.e. given without a title search or requirements to satisfy liens and defects in title).
The second major difference with title insurance is that it insures backwards in time. Where other forms of coverage such as auto insurance and health insurance are purchased for events that may occur in the future, title insurance insures against loss arising from defects that already happened in the past. An example of this could include a newly married couple who recently purchased a home, only to receive a call several months later from an elderly woman saying that her grandchildren sold her home without her approval. If the grandmother was legally in title to the property, the newly married couple may not fully own the home. An Owner’s Policy would typically cover against such a loss.
Title insurance is typically sold through a network of title agents who write the policies of a title insurance underwriter. Similar to your neighborhood Allstate office (being an independent agent for Allstate, typically not owned by Allstate company), it is common for consumers, realtors and mortgage brokers to work with the title agent of a title underwriter, not the underwriter directly. The title agent will typically preform the closing and remit a portion of the title premium to the underwriter.
The two main forms of title insurance coverage are an Owner’s Policy and a Loan Policy. An Owner’s Policy insures the buyer against adverse matters which occurred before they purchased the property, but may pop up as problems during their ownership. As previously detailed, these could be in the form of previous mortgages not satisfied, lack of legal access to the property or owners not accounted for. The coverage under an Owner’s Policy runs for as long as the owner(s) own the lands. A Loan Policy is a little different in that it insures a lender that their lien of mortgage is both valid and superior in priority to all other matters not shown as an exception to title.
In addition to the coverages provided under an Owner’s and Loan Policy, the insured may also purchase additional coverage in the form of an endorsement. Title endorsements vary from state to state but serve to offer coverage for survey elements, mineral rights, violation of restrictions, unpaid assessments and a host of other matters. We’ve already complied a list of Florida Permitted Title Endorsements, you can now also read up on the coverage provided, requirements to issue and pricing for each.
Overall, title insurance can be an abstract concept to most consumers. Most do not fully understand why they’re paying for it or the benefits they’re getting. However, after with a little bit of research and question asking, most come to the understanding that title insurance is another form of asset protection that should be obtained.