Title insurance is one of the most esoteric aspects of buying and owning a home. But that doesn’t mean the subject isn’t important or worth the effort to understand.
Customarily, title insurance comes in two formats: An owner’s policy, which protects the owner of the property, and a lender’s policy, which protects the lender who holds a loan secured by the property.
Insurance protects against claims of ownership
Both types of policies protect against "defects" or problems in the chain of ownership of the property. Examples include missing heirs, fraud and liens. Missing heirs are people who inherit an ownership interest in a property, but can’t be located at the time of the owner’s death. Fraud might involve identity theft or forgery of a prior owner’s signature on a sales contract, for example. Liens might include unpaid property taxes, IRS judgments or contractor’s claims, often called "mechanic’s liens."
Property boundary issues like easements and encroachments also could be protected by title insurance. But problems like soil subsidence or damage to the property from flood, earthquake or fire would not be covered because those problems don’t involve ownership of the property.
Unlike other types of insurance, title insurance protects against problems that could result from past, not future events. The look-back period might be 40, 50 or 60 years, though the time frame varies from state to state. Title insurance doesn’t protect against claims that result from future events.
Refinance triggers new lender’s policy
A lender’s title policy is in-force as long as the loan is on the books. An owner’s policy on the other hand is in-force as long as the owner owns the property. If the loan is refinanced, the owner’s policy remains in effect while a new policy is issued to the new lender. If the same lender refinances the loan, a new lender’s policy typically will still be required.
From the lender’s point of view, title insurance means that if the borrower defaults on the loan and the lender is forced to foreclose on the property, the lender should be able to sell the home without anyone else making a claim of ownership.
From the owner’s point of view, title insurance means that if an unexpected ownership claim surfaces against the property, the owner may have recourse to the title insurer to investigate and resolve the claim and, if there is a loss, compensate the owner.