Title Insurance 101
From time to time, I want to use this space to cover the various aspects of title insurance policies. Think of these posts as a primer, very basic, but something that we all should know about when dealing with real estate and title insurance issues. I will start from square one, assuming that the reader has no experience with title insurance other than perhaps having to buy a title policy when he or she purchased a home, and explain what a title policy is, what it isn’t, and why you need to know the difference. I will also discuss state regulation of the industry, the differences between the various state regulations and forms, and discuss the general claims process. Also, these postings are going to be very informal, so there won’t be any citations to court decisions or state statutes, and should not be quoted as authority in any legal memorandum, brief or article.
Part One: What is Title Insurance?
When you buy a car, you get automobile insurance to protect you in the event you are in an accident. Your automobile insurance policy will pay for the repair or replacement of your vehicle, subject to a deductible, and if the accident was your fault, will generally pay for damage you caused to the other vehicle(s) and it’s occupants. Car insurance is a casualty type of insurance policy, that means that, once you have paid the premium, it pays for events that may happen during the term of the policy. Should you fail to pay the renewal premium, however, your coverage under your insurance policy will terminate. Automobile insurance, therefore, requires continuing, periodic payment of premiums in order to retain your coverage. Automobile insurance is prospective in coverage, as it covers what may happen to your vehicle during the term of your policy, not what has happened in the past.
When you buy a home, you will purchase homeowner’s insurance, which, like automobile insurance, will protect you in the event of a loss. Like automobile insurance, your homeowner’s insurance requires a periodic payment of premium, and will be cancelled if you fail to pay that premium. Loss that may occur during your policy term will be covered in accordance with the terms of your policy, but should you fail to pay your periodic premiums, and your policy is cancelled, a loss that occurs after cancellation will generally not be covered, and your insurance company will have no liability to pay under its lapsed policy. Premiums are based on the value of your home, and you may be eligible for discounts if you have any loss-reducing aspects such as smoke detectors, burglar alarms, how close you live to a fire station, etc. Like your automobile insurance, homeowner’s insurance is prospective in coverage.
While title insurance is like homeowner’s insurance in that you will be buying it when you purchase your home, it is different in almost every other aspect. Title insurance requires only a one-time premium, which you pay at closing. Payment of that one-time premium will get you a policy that will be good for as long as you own your home, no matter how long that is, and you don’t have to pay any more premiums to maintain that policy.
Title insurance is retrospective. That means it covers matters that could affect your title at the time you bought your home, but it doesn’t cover anything you do to your home afterward. Your title policy insures you against loss in the event there is a determination that, as of the date of the policy, you do not really own your home (i.e., a forgery in a back deed), there is a lien against your property that you didn’t know about and that is being enforced against you (i.e., a missed mortgage, or unpaid taxes assessed against your home before you bought it), or someone is claiming that they own a part of your land that you were not told about when you purchased your title policy (i.e., a missed easement, right of way, or encroachment).
The title insurance premium is based on the purchase price of your home, generally determined by the value of the land plus the improvements on that land. The policy amount does not diminish as time passes, nor does it increase without taking special steps to do so. Since there is only a one time premium, and it is paid as part of the closing costs at the time you purchase your home, many people are unaware they are even buying title insurance until they see the premium amount on their closing statement. Then, because there are no recurring premiums, they often forget they even have it. But, in the event of a loss, the title policy will still be there, protecting the homeowner against loss caused by something they had no idea was out there.