To begin, title insurance is a “non-casualty product.” What does this mean? Unlike car, health, or auto insurance which indemnifies or protects the insured party from a future risk or loss, title insurance indemnifies the insured under the policy against a future loss based off a prior risk. In other words, health insurance or car insurance or other types of non-casualty insurance, insure the insured over some sort of loss or negative event that could possibly happen in the future after the policy coverage is bound (i.e. I could possibly break a leg, my house could possibly catch on fire). Title insurance is different in that it indemnifies the insured under the policy of any future risk or future damage that could occur as a result of some sort of a defect exiting as of the date that the policy was written.
Okay, okay – I probably lost you there, and your eyes just rolled back into your head. What does this mean? Let me break it down to you step by step.
As a title company, my job is to transfer title to real property. Most of the time, the transfer of real property is in the course of a sale and purchase between a seller and a buyer that do not know each other personally. This is known as a third party arm’s length transaction, meaning no one is related to each other, or even knows each other personally, outside of the sale transaction. Because of this, virtually every sale transaction requires that the seller or the buyer pay for a title insurance policy.
Why? Because the buyer doesn’t know the seller or the property personally. Who knows what the seller has been doing with the property. What if the seller doesn’t actually own the property and has no right or authority to sell the property? What if there are liens on the property? If any of these defects or issues exist on the property, the moment the buyer acquires title to the property, the buyer is now on the hook for ALL of these issues. There is a myriad of possible negative circumstances or situations that can occur when dealing with real estate.
As a result, title insurance and title agents come in. Before a title insurance policy can be issued, comprehensive searches and examinations of the property must be performed. First, I order a title search from my underwriter. My underwriter then provides me with a report that reflects EVERYTHING that has been recorded against the property and then issues a title commitment which identifies all the requirements that I must satisfy before I can issue a clean title policy to the buyer. Some of these requirements might consist of satisfying a mortgage that exists on the property or paying outstanding property taxes. Other times the requirements are more complex. For example, sometimes an owner of a property has just passed away, and as a result, a probate of his or her estate is required before the property can be transferred. Sometimes the property is in the midst of a foreclosure or a pending tax deed sale. Real estate is very complex and exciting, and I am unable to count on my two hands, the various strange scenarios I have experienced over the years.
Once I review all of the necessary searches and reports and satisfy all my title requirements, then I am able to issue a title insurance policy to the proposed new owner of the property. This title policy indemnifies the new owner (insured) against any possible claims or losses that could occur as of the date that I issue the policy. In other words, the title insurance underwriter / carrier will defend the insured against any future loss for a defect existing in title that was somehow missed. An example of some of these defects / risks are:
Deeds from person who are not owners of the property or other persons or parties that are not authorized to convey the property (i.e. the son tries to convey his parents property to at third party)
Ineffective releases or satisfactions of mortgages
Incorrect or improperly indexed deeds
Undisclosed but recorded lines or judgments
The list goes on and on.
As you can see, in today’s uncertain market filled with fraud and uncertainty, it is essential that anyone that is acquiring title from a third party whether by sale, gift, or quit claim, should require or purchase a title insurance policy.