When buying or selling real estate, one of the most important but least understood parts of the transaction is title insurance. In most real estate transactions, the seller will pay for title insurance to protect the buyer. This is especially true when a seller provides a general warranty deed (a legal promise that the title is clear). The insurance helps give everyone peace of mind: the seller knows they’re delivering clear title, and the buyer knows their new property is protected. However, while title insurance is an important safeguard, it’s not all-encompassing. Understanding what title insurance covers—and, crucially, what it doesn’t—is vital for protecting your real estate investment.
What Is Title Insurance?
Title insurance is a form of indemnity insurance that protects real estate owners and lenders against loss or damage stemming from defects in a property’s title. Unlike other forms of insurance that cover future events (like car accidents), title insurance primarily protects against past events in the history of ownership of the property. Another way to say this is the chain of title. Defects could include issues such as liens, encumbrances, clerical errors in public records, undisclosed heirs, or forged documents. A good title company will perform a thorough search prior to issuing a policy, but many of these problems may remain hidden despite a thorough title search and might come to light years after the transaction.
There are two common types of title insurance policies:
- Owner’s Policy: This protects the buyer’s ownership rights and is typically purchased for the buyer by the seller. It lasts as long as the buyer retains title to the property.
- Lender’s Policy: This is usually required by the mortgage lender for the buyer to purchase. It protects the lender’s financial interest until the mortgage is paid off.
What Title Insurance Does Cover
Title insurance policies generally cover risks related to the title of the property, including:
- Errors in Public Records: The buyer is protected from mistakes in recorded legal documents, such as misfiled deeds or incorrect legal descriptions.
- Unknown Liens: Prior owners may have incurred debts (like unpaid contractor bills or tax obligations) that can result in liens on the property.
- Invalid Deeds: If a past deed was executed by someone without legal capacity (e.g., due to age or mental incapacity), ownership could be challenged.
- Missing Heirs or Undisclosed Wills: Heirs who were not identified at the time of prior transfer could come forward and claim rights to the property.
- Forgery or Fraud: If previous documents in the chain of title were forged or fraudulent, they can put your ownership at risk.
These kinds of problems are rare, but when they happen, they can be expensive to deal with. Title insurance helps cover the financial loss and legal costs if such claims arise.
What Title Insurance Does Not Cover
While title insurance offers valuable protection, it’s not a catch-all. There are some key limitations and exclusions that property owners should be aware of. Each policy is different, but below are some examples:
- Policy Exceptions: Every title insurance policy includes a list of exceptions for issues that will not be covered by the policy. This might include things like easements or known boundary issues unless you purchase an additional endorsement.
- Post-Closing Events: Title insurance only covers issues that existed before you bought the property. It won’t protect against future problems like zoning changes or new liens.
- Owner-Created Issues: If the property owner knowingly causes a problem (such as agreeing to a restrictive covenant or ignoring a known defect) those issues will not be covered.
- Survey-Related Problems: Encroachments (like a neighbor’s fence crossing your property line) and boundary disputes usually are not covered unless you’ve had a current survey and purchased additional protection. A very common exception is any issue that would have been revealed by a survey.
- Transfers: If you transfer the property into a trust or LLC or it’s transferred to your heirs after your death, your title insurance coverage may not automatically continue. Coverage depends on the wording of your policy, specifically how “insured” is defined. Prior to making a transfer to a trust or an LLC, you should contact the title company to ask about getting continued coverage.
Title insurance is an essential component of most real estate transactions that offers protection against hidden defects and risks that could threaten ownership rights. However, it is not a substitute for the parties’ due diligence. Whether you are buying, selling, or transferring real estate, speaking with an experienced attorney can help you understand your specific policy, ensuring that your rights are protected and that title issues don’t become a problem in the future.
Sources:
https://www.alta.org/policies-and-standards/policy-forms/
https://www.forbes.com/advisor/mortgages/title-insurance/#3251469e12bb
https://content.naic.org/article/consumer-insight-vitals-title-insurance-what-you-need-know