What is title insurance and why do you need it?

May 18

Title insurance is protection from financial loss due to defects in the title to a property.

Title is the legal documentation showing ownership of and claims to property. Unlike liability or auto insurance which cover an unanticipated future event, title insurance provides coverage for something from the past that was not or could not be discovered in a title search during the closing process. When you purchase property with a loan and mortgage from a bank, there will be a lender’s policy of title insurance which protects the bank’s interest in the property (in the amount of the loan) – if you lose the property due to a title issue, you will not repay the loan and the bank will have no collateral to secure its loan, so title insurance will make the lender whole. There is also an optional policy of owner’s title insurance to protect you as the owner (in the amount of the purchase price) in the event that a dispute arises regarding part or all of the property – if you have an owner’s policy, the title insurance company will pay to defend your claim to the property and make you whole in the event of a legitimate claim resulting in your loss of part or all of the property.

As part of the closing process when you purchase property, your attorney will work with a title company to bring the title search up to date. The title search is a long document listing every deed, easement, mortgage or other lien that has been recorded pertaining to the property going back to 1920 for residential properties in Erie County and at least 60 years for commercial properties. The title searcher will search the county’s land records as well as bankruptcy filings, judgment rolls and tax records. Although title searchers are experienced professionals, they are human and can make mistakes. There are also rare things affecting title that could never be discovered by a search. There are some examples described below. Another consideration is 2020 – despite shutdowns and quarantine, the real estate industry was busier than ever. However, searches were harder to conduct because searchers could not physically go to the county clerk’s office to inspect records, and deeds and liens had to be mailed in to be recorded, leading to documents getting lost or delayed in the mail in addition to significant recording delays caused by backlogs at the county clerk’s offices.

Here are some examples of scenarios that could be resolved with title insurance:

  1. Totally unknown to you and undiscoverable by the title searcher, the elderly woman in a nursing home that sold you the house had no idea that her house was sold. Her shady caretaker executed the documents and kept the proceeds. The elderly owner intended for the house to go to her daughter. If a judge ruled that the deed was fraudulently transferred, title insurance will cover your loss so that you are not left with nothing.
  2. Sometime in 2020, the person that sold land to you transferred a piece of the land to the neighbor. During the shutdown, the parties’ attorneys prepared transfer documents and mailed them to the county clerk to be put on record. They got lost in the mail. The seller assumes it is taken care of and sells the rest of the land to you, using a different attorney. Your deed shows the entire parcel, and that is what you paid for. Then the first deed turns up and your land is smaller than you thought. If the first transfer is deemed legitimate, you will be reimbursed for the value of the piece that was transferred out.
  3. The title searcher misspelled the seller’s last name by transposing 2 letters and missed a $50,000 lien on the property. If the creditor tries to collect by foreclosing on the property after you bought it, you will not be responsible for repaying the lien on the property.

In these and other title defect situations, if you had a loan, your lender would have title insurance and would be made whole. If you did not have an owner’s policy covering the defect, you could lose part or even all of your property.

Title insurance is a one-time premium that covers you for as long as you own the property. The rates are set by law based upon the loan amount and/or purchase price. If you are getting a loan to purchase the property, the lender will require you to purchase a policy to protect the lender’s interest. At the same time, you may choose to also purchase a policy to protect yourself at a discounted rate. You will also have an option to purchase a market value rider – if a title issue arises several years after you purchase the property and the property’s value has increased, this will give you the market value of the property at that time, rather than the price you paid. The cost of the market value rider is 10% of the premium.

So, the moral of the story is,

Even though title defects are very rare, for a minimal one-time premium, it is better to be safe than sorry!