RealTown Words

A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances. Unlike other types of insurance, which protect a policyholder against loss from some future occurrence (such as a fire or auto accident), title insurance in effect protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title. Fannie Mae and Freddie Mac require title insurance on every loan they buy.

The title company will issue a policy if satisfied with the investigation of the public records and all other material facts. Generally, a title insurance policy protects the insured against losses arising from such title defects (“hidden risks”) as the following:
n Forged documents such as deeds, releases of dower, mortgages
n Undisclosed heirs; lack of capacity (minors)
n Mistaken legal interpretation of wills
n Misfiled documents, unauthorized acknowledgments
n Confusion arising from similarity of names
n Incorrectly given marital status; mental incompetence

In addition, and most important, the title company will agree to defend the policyholder’s title in court against any lawsuits that may arise from defects covered in the policy. A title insurance policy generally consists of three sections:
1. The agreement to insure the title and indemnify against loss
2. A description of the estate and property being insured
3. A list of conditions of and exclusions to coverage

These uninsured exclusions generally include such title defects as the following:
n Rights of parties in possession, not shown in the public records, including unrecorded easements

n Any facts that an accurate survey would reveal (e.g., encroachments)
n Taxes and assessments not yet due or payable
n Zoning and governmental restrictions
n Unpatented mining claims
n Certain water rights

Title indemnity is made as of a specific date. Except with certain policies, a one-time premium is paid, and coverage continues until the property is conveyed to a new owner (including a conveyance to an insured’s wholly owned corporation). It does not run with the land. Coverage is thus limited to the tenure of the named insured, and certain of the insured’s successors by operation of law.

An owner’s policy is issued for the benefit of the owner, the owner’s heirs and devisees or, in the case of a corporation, its successors by dissolution, merger, or consolidation; but the policy is not assignable. For an added premium, title companies will issue an extended coverage owner’s policy for certain properties to cover possible title defects excluded from standard coverage. Such title defects may include the rights of parties in possession, questions of survey, and unrecorded liens.

A lender’s policy is issued for the benefit of a mortgage lender and any future holder of the loan. It protects the lender against the same defects that an owner is protected against under an owner’s policy (plus additional defects), but the insurer’s liability is limited to the mortgage loan balance as of the date of the claim, and liability under a lender’s policy reduces with each mortgage payment, and is voided when the loan is completely paid off and released. Because of this reduced liability, a lender’s policy usually costs less than an owner’s policy. Under a mortgagee policy, the loss payable is automatically transferred to the holder of the mortgage.

Upon foreclosure and purchase by the mortgagee, the policy automatically becomes an owner’s policy, insuring the mortgagee against loss or damage arising out of matters existing before the effective date of the policy. In addition to these policies, title companies also issue policies to cover the leasehold interests of a lessee, a lender under a leasehold mortgage, or a vendee under a contract for deed.

In the event of loss under a mortgagee’s policy, the insurer pays the mortgagee the balance due on the loan, and the owner is thereby relieved from making further payments. The owner will lose the property and the investment unless he or she has obtained an owner’s policy for only a slightly higher premium.
If an insured property appreciates in value (as when an expensive improvement is made), it is good practice to increase the amount of title insurance to cover possible increased losses. Newer policies have an “inflation guard” endorsement to cover appreciation.

Nearly 2,000 title companies belong to the American Land Title Association (ALTA) and use standardized ALTA title insurance policies.