When we hear the word insurance, most of us associate it with a premium we pay for on a regular basis. The unique aspect of title insurance is that the cost is a onetime premium when purchasing real property. Most insurance premiums you pay for are usually protecting you from something that may happen in the future. The premium you pay for title insurance is protecting you for things that have happened in the past and pertain solely to real property.
Historically, purchasing real property was a risky transaction because of the limited availability to access public records and property abstracts. The first title insurance company (First American Title) was formed around 1869 in Philadelphia by a group of conveyancers who recognized the need to protect buyers from title issues that could limit their uses and ownership of the property. Prior to the issuance of a title insurance policy a search of the public records located in the recorders office in the county where the property is located is completed.
The search will provide direction to the seller and buyer under what conditions or requirement must be meet for the title insurance policy to be issued. This report will list items that will be excluded from coverage under the policy and list other items that are covered. Let me give you an example of why title insurance is important.
Jim and Mary who are husband and wife want to buy their first home. They have good friends who are selling a house and it is perfect for Jim and Mary. Because Jim and Mary have a long standing relationship with their friends they decided to save some costs and exchange deeds and money without purchasing title insurance. A few years down the road Jim and Mary decide that their house is too small for their growing family and want to sell. This time they go through a realtor who finds a buyer. According to the purchase contract Jim and Mary must purchase a title insurance policy for the new buyer. During the title search several federal tax liens and judgments are found against their friends who sold them the property originally. Now in order to sell the property these liens and judgments must be dealt with because now these items “attach” to the property. If Jim and Mary had purchase a title insurance policy, those items would have been disclosed. Let’s pretend that Jim and Mary did buy a title policy and these liens were missed and not disclosed, they still would be covered under their policy. This is one simple example as to why title insurance is needed and provides value to consumers who are purchasing real property.
The standard policy provides protection such as the following:
- The person insured on the policy has record ownership of the interest purchased.
- No recorded title defect, liens or encumbrances on the title which the insured was not aware of or shown as an exception from coverage.
- Access to and from the property
- Marketable title to the property
The standard policy does exclude certain things from coverage because certain items may not be of record:
- Taxes or assessment not shown on the records of the taxing authority or public record.
- Defect that are not shown by public records or items that would be found by an inspection of the property.
- Easements, liens or encumbrance which are not shown by public records.
- Unpatented mining claims, patent reservations and water rights.
- Labor or Mechanics liens which are not shown by the public records.
Title Insurance companies have created policies that now increase coverage for the average homeowner which would include coverage of the items mentioned above but now include coverage for issues like forgery and encroachments. Certain types of policy even increase in value to the insured therefore each year they are provided additional protection. I know that I might be a little bias because of my chosen career field however it is clear that title insurance is needed for the protection of anyone who wants to purchase real property. Below is a link that provides additional information about the importance of title insurance.