A title insurance policy is very different from other insurance contracts written to insure against fire, accident or other casualties. This policy is a contract that indemnifies the insured from loss or damage resulting from defects, liens or encumbrances to the particular land covered by the title insurance policy.
Title insurance particulars include: (1) Coverage against past events; (2) One time premium; (3) Cover delayed losses often occurring long after the issuance of the policy; (4) Insured closing service is valuable to lenders; and (5) Nominal cost.
There are basically two types of title insurance policies; Owner’s policies, sometimes called fee policies; and Loan policies, sometimes called mortgagee policies.
Every buyer/owner should protect his investment by obtaining an Owners Title Insurance Policy. This policy protects the buyer/owner for as long as he owns an interest in the property. Owner’s policies are available to cover fee interests as well as leasehold and undivided ownership interests. The amount of owner’s coverage is usually based on the sale price of the home or land. In the case of new construction, the coverage amount is usually based on the appraised or estimated value of the improvements.
Owner’s title insurance will insure the buyer/owner of property against hidden risks and defects asserted against his property. There is always the risk that the seller may lack title to the property he is purporting to convey because of a problem in the chain of title. In addition, because of a number of rights, claims and interests recognized by law, the seller may not own all of the interests he is purporting to convey. The policy provides the buyer/owner with a solvent company to defend his title. Furthermore, the title insurance company’s liability increases the longer one owns the property because the owner is acquiring more equity in the property. Real estate attorneys should insist that their clients purchase owner’s insurance because it affords their clients substantially greater protection than would be afforded to them by an attorney’s Certificate of Title.
Lenders recognize and understand the potential problems that may occur with respect to a real estate transaction, so lenders require a loan title insurance policy to protect the amount of their loan. In the event there is a successful attack upon the title to the property, and the lender has a loan policy, the lender can look to the title insurance company for repayment of the loan up to the face amount of the policy. The protection provided to a lender is different from that of an owner. The lender is interested in the enforceability, validity and priority of his lien. A loan policy also insures lawful assignees of the debt after the issuance of the initial policy.
A loan policy is subject to all covenants, conditions and restrictions affecting the property. However, the title insurance company, through the issuance of its loan policy, assures the lender that the covenants have not been violated, and that any future violations will not affect the validity or priority of the insured mortgage.
The liability under a loan policy decreases as the payments are tendered to the lender. The policy is extinguished when the debt is satisfied. It is imperative to remember this in the case of interest rate reduction refinance transactions. Lenders should obtain new loan policies for the refinanced transaction.