What Is Title Insurance?
Title insurance is significantly different from homeowners insurance and other casualty insurance. Casualty insurance provides protection from losses due to unknown future events such as fire or theft for a specified period of time (e.g. a yearly premium for a year of coverage).
Title insurance provides protection for a one time premium for an indefinite period of time from future losses because of events that have already occurred (e.g. claims of ownership). Because of this, title insurers eliminate risks and prevent losses in advance through extensive searches of public records and thorough examination of the title.
For example, in the event that there is a claim against the title to your property by the ex-wife of the seller that was unknown or undisclosed at the time the title policy was issued, the title insurer would be obligated to defend that claim against your property. If it was proven in a court of law that the ex-wife did have a right to the property, the title insurer would be obligated to compensate you for your losses.
What are the Different Types of Title Insurance?
There are two types of title insurance policies — the owner’s policy and the lender’s policy. The owner will typically purchase the Standard Coverage Form in the amount of the purchase price of the property. It does not cover increases in value unless you purchase an endorsement. It covers the buyer’s interest in the property for as long as the buyer or his or her heirs have an interest in the property subject to certain limitations.
The lender will typically purchase the Extended Coverage Form in an amount equal to the mortgage loan. It covers the lender’s interest in the property for the life of the loan. It provides additional coverage not found in a typical owner’s policy such as unrecorded easements and boundary discrepancies. Owners may elect to purchase a Homeowner’s Policy of Title Insurance instead of the Standard Coverage Form. Introduced in the 1990s, this policy includes the standard coverages of a typical owner’s policy and additional coverages, such as forgery occurring after the policy effective date and increases in the value of the property.
Do I Need Title Insurance?
If you are borrowing money for a piece of property, most lenders will require a lender’s policy to protect their interest in the property. You are not required to purchase an owner’s policy, but you should weigh the potential impact of a loss against the cost of the title insurance. Neither the lender’s policy nor the policy of the previous owner will protect you if there is a claim. Also, there is generally a substantial discount when a lender’s policy and owner’s policy are purchased together.
I Am Purchasing a Newly-Built Home. Do I Really Need Title Insurance?
Even though you are the first owner of the home, there have likely been many previous owners of the unimproved land. There may be mechanics’ liens on the property placed by unpaid contractors and subcontractors. A title search will uncover any existing liens, and a survey will determine the boundaries of the property being purchased.
I Am Refinancing My Home. Why Does the Lender Require a New Title Policy?
It is not necessary to purchase a new owner’s policy when you refinance a home. Your original policy purchased when you bought your home is effective as long as you and your heirs have an interest in the property. However, most lenders require a new policy based on the new transaction amount to protect their investment in the property because defects in title might have arisen between the original purchase and the refinance.
For example, a building contractor may have put a mechanic’s lien on the property, or you may have incurred a judgment for unpaid taxes, child support or homeowners association fees. The new policy would also cover defects not detected when the previous policy was issued. Many title insurers have a discounted rate for lender’s policies on a refinance. Be sure to ask your lender or title agent about these discounts.
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