| The purchase of a home is the most important and expensive investment that most people ever make. Consequently, when they make this investment, buyers want to be reasonably sure that the property they're buying will actually become theirs and that no one else will have a valid lien or other claim on the property. That's where title insurance comes in.
Title insurance is a difficult concept to explain, and just as tough for many people to understand. Put as simply as possible, this insurance helps protect property owners from financial losses that could result from a non-owner claiming to have an interest in the property.
While the usefulness and sensibility of title insurance seem questionable to many home buyers, it is a fact of owning real estate that almost every transaction involves acquiring title insurance. The fact is, every conventional lender making real estate loans requires borrowers to have title insurance as part of the real estate transaction, even if the transaction is just a refinance of the property.
Lenders' basic justification for requiring title insurance is that the insurance is necessary to help protect the lender's security interest in the property. If a contractor has filed a lien, for example, and attempts to take the property to pay the lien, the lender wants some assurance that the lender may be able to recoup his loss through filing a claim under the title insurance policy.
Two basic types of title policies are involved in most transactions: an owner's title policy (or standard policy, protecting the buyer), and a lender's title policy (or ALTA extended policy, which protects the lender). Although payment for these policies is always negotiable, customarily the seller pays for the owner's title policy, and the buyer pays for the lender's title policy. (Other types of title policies are available, but are not used in
most residential real estate transactions, so they're not discussed here.)
The coverage provided by these two policy types differs substantially. The owner's policy provides a minimum level of coverage and protects the owner only against claims (or potential claims) that the title company should have discovered in a search of public records, but didn't. The lender's ALTA extended policy provides the minimum protection of a standard policy, plus additional coverage to protect against some circumstances that could not have been
known by any parties at the time the transaction was completed.
Interestingly, an owner's title policy costs about two to three times more than an ALTA extended policy. Payment for both types of policies is by a one-time premium that is paid to the escrow agent at the time of closing of the transaction. The value in most title policies relates more to the research process involved in the issuance of each policy than to the actual claims protection. In order to provide
actual value to consumers and to minimize claims, each title insurance company in Oregon performs a thorough search of public records for every property it insures. The results of these searches often provide useful information relating to adverse claims about a property being purchased. These results are then provided to the buyer and the lender so that they can decide if they want to take the property with the claim or to make sure the claim is removed prior to purchase. Because of the nature of title insurance—the one-time fee and lifetime coverage—the insurance does not protect owners against events that occur after a property is purchased. The research process only can disclose documents that show events that already have
happened; it cannot show documents that have yet to be filed or recorded publicly. Title companies research a variety of government sources for the information they report. They do not, however, search privately-owned sources like newspapers, magazines, the Internet, and so on. Information in these sources must be researched and found by the buyer. Title companies also do not report information from planning and zoning agencies, such as allowed
uses for a property or building standards. Despite all of the exceptions to title insurance protection, especially in a standard policy, having the coverage is important. The research process involved in issuing a policy ensures that the odds of a valid claim being filed are slim. The coverage that is provided ensures that the cost of any valid claim will be borne by the title company. Also,
unlike life, health and casualty insurance policies, title policies even include coverage for legal fees and expenses. Answered below are some of the more commonly asked questions about the coverage provided by title insurance. What's the difference between title insurance and casualty insurance? Title insurers work to identify risks and eliminate
them before issuing a policy. Casualty insurers assume that a certain number of losses will occur over time, and they collect recurring premiums to set aside money to pay claims for those expected losses. Who needs title insurance? Buyers, sellers and lenders in real estate transactions all benefit from title insurance. The process of issuing a title policy makes sure that all parties are
reasonably informed about defects, or potential defects, in the title—or ownership rights—for the property involved in the transaction. What types of property do title companies insure? Title insurance companies provide policies for all types of real property, including single-family detached homes, subdivisions, office buildings, agricultural land, and so on. What are the chances of ever using the actual coverage provided in a title policy? Because title companies are risk eliminators, the likelihood of an owner ever filing a claim is very
low. If I'm buying property from someone I know, do I still need title insurance? People don't always know their friends, neighbors and relatives as well as they think they do. Many people undergo changes in their personal lives that can affect the title to their property. Some may not even know that a potential title defect exists. Divorce, death, marriage, financial problems and a variety of
other life events can affect ownership rights in a property. Just as any prudent buyer wouldn't make a stock purchase based only on a call from a telemarketer, no one should buy real estate without some independent research regarding the quality of the investment being purchased. Title insurance provides the best protection for a buyer's ownership rights. What if the coverage of a standard policy
isn't satisfactory to me—do I have other options? Yes. Talk to your title representative
about purchasing ALTA extended coverage for your owner's policy, and make sure to let your real estate broker know that you want this coverage. That way he can negotiate the additional cost into your purchase contract. |
