What is Title Insurance? - Definition & Purpose

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  • 0:02 What Is Title Insurance?
  • 0:29 Purpose Of Title Insurance
  • 1:34 Determining Insurability
  • 2:33 Title Policies
  • 3:52 Coverage
  • 5:10 Lesson Summary
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Lesson Transcript
Instructor: Racquel Fulton

Racquel is a Real Estate Licensee and holds a New Jersey Title Insurance Producer Certification

Title insurance differs from most types of insurance. Policyholders are protected from liabilities that have occurred in the past as opposed to something that may occur in the future. Learn what title insurance is and why it is an important part of real estate transactions.

What Is Title Insurance?

A title is a group of lawful rights that includes the right to own, use, lease and sell real estate. However, rights within the title can be challenged due to errors, oversight and neglect. Title insurance provides financial security when claims threaten those rights. It is a unique form of insurance that covers liabilities that may arise from the past as opposed to a catastrophe that may occur in the future.

Purpose of Title Insurance

The purpose of title insurance is to protect buyers and lenders from risks of claims against their rights. Imagine that you purchased a home and received the title from the previous owner. One month after moving in, you receive a notice demanding payment for an outstanding tax bill from the previous year. If the bill is not paid, your home will be auctioned off to satisfy the debt. Although you were unaware of the bill, as the new owner, you are responsible to pay it. The unpaid bill is an encumbrance.

An encumbrance is anything that hinders rights within the title. There are voluntary and involuntary encumbrances. Involuntary encumbrances commonly arise from lawsuits resulting in judgments and liens, such as a mechanics lien, which is when a contractor sues a property owner for payment. They could also be caused by clerical errors or fraudulent transfers of title. An example of a voluntary encumbrance is a mortgage. For instance, you agree to allow a lender to place a lien against your property as collateral until you repay the loan.

Determining Insurability

During real estate transactions, title companies are hired to investigate the history of the title to verify information and identify encumbrances. This includes a search of public records that may uncover liabilities, such as liens, judgments and outstanding debts. The searcher compiles the information in a title report. However, many issues can arise from what may not appear in the public records, such as the previous owner's missing heir or that unpaid property tax bill.

After examining the title report, risks are assessed. A determination is made regarding the status of the title and requirements that must be met before insurance can be issued. In some real estate transactions, a party may obtain an attorney's opinion of a title instead of purchasing title insurance. Although an attorney's opinion serves as an acceptable professional perspective, it does not provide the financial protection of title insurance on claims against the owner's rights.

Title Policies

A title insurance policy is a contract of indemnity. To indemnify means to compensate for damage, losses and liability. Title policies do not guarantee that there are no encumbrances, liens or defects in the title. Instead, it is as if the insurer is saying, 'If a claim results from a past event that affects the title, we will hold you harmless and pay it.' If the insurer pays a claim on your behalf, they may exercise subrogation rights, allowing them to take legal action against whomever caused the loss in order to recover the amount of the paid claim. The two primary types of title insurance policies are an owner's policy and a lender's policy.

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