Understanding Title Insurance

4 Replies

Hey all, thanks for looking into my forum question.  I appreciate it.

I'm taking a real estate class at UCLA.  It's a good class with a good teacher, but the textbook doesn't provide much context.  That's where I'm hoping you all would come in.

I'm trying to wrap my head around title insurance.  I know it's a very good idea to have it (although not required by law) but I'm not sure I understand it.

In what instances would Title Insurance come into effect?  Specifically, what money losses could occur that Title Insurance would give you money for?

Hi Brandon,

Fellow Bruin!  Title insurances insures you that when you purchase the property, the title is free and clear.  That there is not someone else claiming they own the property, or any liens on it that have not been paid. Here is a simple read article online, I hope it helps.

http://homeguides.sfgate.com/purpose-title-insurance-2571.html 

Let's say John and Mary Smith own a home together in Bakersfield. Their marriage falls apart and they separate, but don't divorce. Mary moves to Boston for post-graduate work at Harvard. John stays behind and lives in the home in Bakersfield.

Subsequently John sets up housekeeping with Jane Doe. Eventually they decide to sell the house and move to Temecula. They sell the house and Jane illegally represents herself as Mary during the transaction. You are the buyer of the house.

Now fast forward a few years. Mary has finished her Phd and moves back to Bakersfield to discover that John has sold the house without her consent. Legally, she still has ownership interest in the property and could sue to claim it, and you would probably lose. But you would still be on the hook for the mortgage which you signed.

Title insurance will pay to defend you right to own the house, or will pay you for the loss if you don't prevail. If you don't have title insurance you're SOL.

That example is literally one from one of my classes that I still remember to this day. Hope it helps.

Fred gave a good example. More examples can be found with an owner passing away and an heir is not represented in a sale. If a neighbor has a filed easement, legally described, and they claim more than the legal description, TI may then kick in to defend you. If a claim is made by heirs or anyone as to ownership rights from previous owners, your TI steps in to defend against those claims. If documents of your transaction are in error and you have an insured closing, costs to correct the matter are covered. Along with an owner's policy, a lender's policy is available for any mortgagee, it will be required with conventional mortgages.

To say that TI is not required by law, that is a bit off, many states define passing good title to a property as passing an insurable title. If you were to buy a property that was not insurable, or failed to obtain TI, any defect in title will be on you. TI covers you forever, not just during your ownership, so if a matter arises that was from a previous owner and claims are made against any future owner, your policy covers you in the chain of title.

Not obtaining TI exposes you to risks of passing good title to future owners, any claims made during or before your ownership, you'll have to defend. Costs of defending title can exceed the value of the property, paying off any mortgage, indemnification of equity, attorney fees and court costs and perhaps other liens or costs of claims. 

Breaking the chain of TI can be an issue for future owners obtaining their title coverage, your period of ownership may be excluded. Even if a bogus claim is made concerning your period of ownership, the costs to defend your ownership and the future owners' rights may fall on you. 

For exclusions to coverage, look at Schedule BII of the ALTA standard policy, what is not covered will be listed on that Schedule of Exclusions. Liens or encumbrances not made of public record or coverage as to area and content of land without a proper survey are general exclusions. Liens not filed in a timely manner are not perfected and easy to defend against, a survey will show the area and content, another easy solution. There are other matters which may not be insurable, so read the exclusions carefully and the TI agent will inform you of items and risks associated with any exclusion. 

Unless your ownership period is a few minutes, really seconds in filings, going without coverage is not a good idea. Even going for seconds in filing deeds can still put you at risk of defending title, the buck can stop with you. I admit, I have done a few deals without coverage, but I also knew the properties very well, knew the factors associated with the title, knew they were clean without any construction or other matters that could be the basis for any claims, and, I was willing to accept the risk (self insure) my period of ownership. Not an area for new investors to venture into, it's always best to insure title. :)   

Wow! Those were some great answers everyone! I wish you all wrote my textbook!

I now have a much clearer understanding of Title Insurance and I certainly won't make a deal without it!

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