Title Insurance: What Is It And Why Do We Need It?

written by Christina Tucker

What are those line items on a settlement statement- owner's policy, lender's policy, and endorsements?

Title insurance is probably one of the most important items and yet the most misunderstood part of any real estate transaction. Title insurance differs from other types of insurance in that it focuses on risk prevention, rather than risk assumption. To put it simply, title insurance is a way to protect yourself from financial loss and related legal expenses in the event there is a defect in title to your property that is covered by the policy.

How does Title Insurance work?

Once you are under contract, a title insurance company will research the historical publicly recorded documents filed against the property.  They will look for proper ownership transfers, i.e. chain of title- Did Bob Smith correctly and rightfully transfer this property into Jane Doe’s name?  Are there any liens or loans against the property or owners that need to be paid off and removed from title? Are any agreements recorded where past owners have made with government or private parties that affect the property i.e. easements or access grants? 

Once all the research data is compiled, a title commitment is generated.  This is the title company’s commitment to the parties they will insure the property is free and clear of any encumbrances to ownership with exceptions (exclusions) and after all requirements are satisfied.

The commitment itself is straightforward.

How do I read the Title Commitment?

Schedule A- a breakdown of the components of the real estate transaction- the effective date of the agreement- most likely the date the county records have been verified through, the insured parties, the value of the sale and the amount being charged to insure.  

Endorsements- any endorsements listed on Schedule A are separate extensions of coverage that may directly relate to any Exceptions (exclusions) of coverage listed on Schedule B2 or are required by a lender, attorney etc. 

Schedule B1- Requirements- a detailed listing of all items the title company must confirm have been satisfied to facilitate the closing of the transaction and insurance to be issued. It may be things like a Certificate of Good Standing from the Secretary of State or the payoff of a lien on the property.

Schedule B2- Exceptions- a detailed listing of all items the title company will NOT insure.  These items are usually items out of anyone’s control.  I.e.. Utility agreements, covenants, controls, and restrictions recorded easements or details that were itemized outside of the norm on a survey of the property i.e.. A fence line that varies slightly from the true property line. 

The commitment and subsequent information are an opportunity for the buyer to assess any acceptable risk of ownership and/or opportunity to object so that the seller has a chance to correct or “cure” any title defects.  If there is anything that cannot be corrected, the buyer has the option to terminate the contract (per proper procedural language and dates)

When all is settled, the onetime premium is paid out of closing and the transaction is complete.  The title company will issue the new owner an insurance policy that stays with the property as long as the current owner remains in title.