Title Insurance Explained in Plain English

Purchasing a home or commercial property is possibly one of the biggest, most important investments you will ever make. Title insurance is one of the most important pieces of a transaction, but it is also one of the most misunderstood.

Here is a plain English explanation of what it is and how it works:

In most, if not all, real estate transactions a title search is done to determine what issues exist that may affect title to the property. The title abstractor goes through the public records and collects all of the information – checking the county courthouse, for example, for prior deeds in the chain of title, open mortgages, liens, judgments, restrictions, rights of first refusal, open estates in probate court, divorce decrees, and other records of matters that pertain to title to the property that is the subject of the transaction. The title abstractor collects and assembles that information and provides it to the closing attorney who, in most instances (at least in South Carolina) is also the title insurance agent. The abstractor’s search typically goes back in time 40 years (residential) or 60 years (commercial).

Then, the title agent (usually the closing attorney) examines all of the title work to determine what issues there are, if any, that need to be addressed prior to closing. The objective is to identify what risks there may be for the insured (you – the new owner) so that we can minimize or eliminate those risks. Risks are present in all real estate transactions.

After the title agent examines the title work to identify and minimize or eliminate these risks, he or she can then issue the title insurance policy (at closing or after the deed and mortgage are recorded). By issuing the insurance policy, the title insurance company essentially agrees to take on the risk of potential title defects that may still be out there that either:

1) did not show up in the public records search or

2) are hidden risks that could not be detected by a title examination or those risks that occurred outside of the 40 (or 60) year search period.

One of the best ways to understand what title insurance is / how it works is to compare it to other insurance policies you are probably more familiar with, like homeowner’s (hazard) insurance or car insurance. Those policies (homeowner’s and car insurance) protect you from things that might happen in the future, and you pay an annual premium for these insurance policies. Title insurance protects you from things that have in fact already happened, in the past, we just may not know about them yet. You pay one premium, ever – not an annual recurring premium – and the policy covers you as long as you, or your heirs, own an interest in the property.

Here are just a few real life examples of the kinds of risks/title defects that the title insurance policy covers:

• judgments against a prior owner that were not discovered or paid off prior to your purchase of the property (this just happened with a property I recently closed – it is a very real problem! Thankfully the owner/seller had a title insurance policy).
• a deed or mortgage (or a satisfaction of lien or judgment) in the chain of title to your property was forged
• a deed or mortgage in the chain of title to your property was executed under a power of attorney that was revoked or expired
• a deed was executed by a seller/grantor who lacked the mental capacity to execute the deed
• errors in legal descriptions (which are critical – the legal description defines the property that you actually own – your property is not defined, legally, by your street address)
• undisclosed or missing heirs to an estate
• mistakes in recording documents
• errors in tax records
• liens for unpaid estate, inheritance, income, or gift taxes

The bottom line in plain English: the title company pays for defending against lawsuits attacking your title and will either clear up the title problems or pay the insured’s (your) losses.