WHAT IS TITLE INSURANCE?
Title insurance is protection
against loss arising from problems connected to the title
to your property.
Before you purchased your home, it may have gone through
several ownership changes, and the land on which it stands
went through many more. There may be a weak link at any
point in that chain that could emerge to cause trouble.
For example, someone along the way may have forged a signature
in transferring title. Or there may be unpaid real estate
taxes or other liens. Title insurance covers the insured
party for any claims and legal fees that arise out of such
Is Purchasing Title Insurance Obligatory?
It is if you need a mortgage, because all mortgage lenders
require such protection for an amount equal to the loan.
It lasts until the loan is repaid. As with mortgage insurance,
it protects the lender but you pay the premium, which is
a single-payment made upfront.
Does Title Insurance Do Anything For Me?
The required insurance protects the lender up to the amount
of the mortgage, but it doesn’t protect your equity in the
property. For that you need an owner’s title policy for
the full value of the home. In many areas, sellers pay for
owner policies as part of their obligation to deliver good
title to the buyer. In other areas, borrowers must buy it
as an add-on to the lender policy. It is advisable to do
this because the additional cost above the cost of the lender
policy is relatively small.
Doesn't the Lender Policy Indirectly Protect Me?
No, title policies are indemnity policies, they protect
against loss, and a lender policy would only cover the lender's
loss. Of course, the fact that the insurer issued a policy
to the lender indicates that the title has been searched
and nothing amiss has been found, but no search is 100%
dependable. That is why an insurance policy is issued.
When Does Title Insurance Protection Begin and End?
With the exception noted later, title insurance only protects
against losses arising from events that occurred prior to
the date of the policy. Coverage ends on the day the policy
is issued and extends backward in time for an indefinite
period. This is in marked contrast to property or life insurance,
which protect against losses resulting from events that
occur after the policy is issued, for a specified period
into the future.
For How Long Is the Property Owner Purchasing Title
Indefinitely. The owner’s protection lasts as long as the
owner or any heirs have an interest in or any obligation
with regard to the property. When they sell, however, the
lender will require the purchaser to obtain a new policy.
That protects the lender against any liens or other claims
against the property that may have arisen since the date
of the previous policy.
For example, if the contractor you failed to pay for remodeling
your kitchen places a lien on your home, you are not protected
by your title policy; the lien was placed after the date
of the policy. You will probably be required to get the
lien removed before you can sell the property. But in the
event the lien hasn’t been removed and a search has failed
to uncover it, the new lender will be protected by a new
Will Title Insurance Protect Me Against False Claims
That Arose After I Purchased the Property?
The standard policy does not, which is a weakness. Many
events beyond your control can reduce the value of your
house after you buy it. Identity theft can result in a new
mortgage you know nothing about. A neighbor could build
on your land without your knowledge, thereby adversely possessing
and possibly eventually taking your land. Or you may suddenly
be told that you must correct a zoning violation of the
To deal with these issues, a new policy with expanded coverage
has been developed. I am told it is virtually standard in
California and is available in many other states, perhaps
at a small price increase. It is usually referred to as
the ALTA Homeowner’s Policy.
Does Title Insurance Coverage Rise With Increases
in the Value of My Property?
No, but coverage under the ALTA policy referred to above
increases by 10% a year for the first 5 years after issuance,
to 150% of the initial amount. You can buy additional coverage
as a rider to the policy.
If your policy does not have such a rider and your property
has appreciated sharply in value, you may be able to purchase
additional coverage on the same policy by paying an incremental
fee. The fee should be modest because because no new title
search is involved. The coverage will only apply to title
defects that existed prior to the original date of the policy.
To extend the coverage to events that may have clouded the
title since the original policy, you would need to take
out a new policy with a new search and pay the full rate.
Why Do I Need to Purchase a New Policy When I Refinance?
You don’t need a new owner’s policy, but the lender will
require you to purchase a new lender policy. Even if you
refinance with the same lender, the existing lender’s policy
terminates when you pay off the mortgage. Furthermore, the
lender is concerned about title issues that may have arisen
since you purchased the property, such as the lien mentioned
in an earlier question. A new title search will uncover
the lien, and you will have to pay it off as a condition
for the refinance.
Insurers generally offer discounts on policies taken out
within short periods after the preceding policy. In some
cases, discounts are available as far out as 6 years from
the date of the previous policy. Ask for it, it may not
be offered if you don't.
Are Title Insurance Premiums Fair to Low-Income
Probably they are more than fair. Most title insurance costs
arise in preventing loss rather than paying claims, and
prevention costs are not much different for a small policy
than for a large one. Despite this, premiums are scaled
to the amount of the mortgage or the value of the property,
which suggests that smaller policies may be under-priced
and larger policies overpriced.
Does Title Insurance Guarantee Me That I Will Be Able to
Sell My Property If An Unforeseen Claim Arises?
No. Title insurance does not prevent loss of marketability
due to a title claim, any more than fire insurance prevents
fire. If a claim arises, you probably won’t be able to sell
your property until the claim is settled by the title insurer.
The interest of the owner and the insurer may clash in such
cases. The owner usually wants settlement immediately, whereas
the insurer wants to minimize the cost of settlement, which
may require time-consuming negotiations with the claimant.
Does a Borrower Have the Right to Purchase Title
Insurance on Her Own?
Yes, although few exercise it. Most leave it up to one of
the professionals with whom they deal – real estate agent,
lender or attorney – to select the carrier. This means that
competition among title insurers is largely directed toward
these professionals who can direct business rather than
It is a good idea to ask an informed but disinterested local
whether it pays to shop in the area where the property is
located. Just keep in mind that those likely to be the best
informed are also likely to have an interest in directing
your business in the direction that is most advantageous
Are Title Insurance Premiums Deductible?
Under existing rules, they are not. If the tax code was
logically consistent, however, premiums paid by borrowers
on lender policies -- those that protect only the lender
-- would be deductible. The same is true of mortgage insurance.
Thanks for being a friend of Franklin Title Agency,