There is a common question asked of almost every mortgage lender, whether it be a purchase or a refinance. That question is; “why do I need Title Insurance?” To answer that question you first need to understand what title insurance is. Title insurance is an insurance policy or contract issued by a title company to protect the owner as well as the lender against a loss that may arise by reason of a defect in the ownership interest in real property.
In addition, the title insurance company agrees to defend you or the lender in court if there is an attack on the title to that property. There are two main types of policies available for the average property owner. The Owner’s Policy protects you up to the face amount of the policy during your ownership and after you have sold the property if you have warranted the property to your subsequent buyer. The Mortgagee’s Policy protects the lender’s interest only so long as the loan is outstanding and only in the amount of the balance of the loan at any given time.
The most common problem, challenge or question that comes from the issuance of Title Insurance is the reasoning behind the need for the insurance. Since most property owners mortgage or borrow money at the time of purchase or during ownership, the lender can be expected to request protection of its investment against loss. Lenders know that many things can cause loss of title or that expenses are incurred while defending an attack.
They insist upon a Mortgagee’s Title Insurance Policy to protect their stockholders’ and investors’ investment in your property. An Owner’s Title Insurance Policy protects your investment (equity) as the buyer or owner of the property. As the owner, you should want to have the same assurance as the lender that the investment you have made cannot be lost because of a problem or defect with the title.
There are numerous defects or problems that can arise to cause an attack or loss of the title to your property. Some of these include problems not disclosed by the most careful search of the public records (the title search). Hidden risks can cause a total loss of your investment or heavy legal expenses in the defense of an attack on the title. Some title problems may show up months or years after the original purchase of the property.
The following are examples of matters that can cause loss of title or an expensive lawsuit:
- Forged deeds, releases, wills or other legal documents;
- Failure of spouses to join in conveyances;
- Undisclosed or missing heirs;
- Deeds from minors, aliens or persons of unsound mind;
- Errors in indexing of public records;
- Liens for unpaid taxes including estate, inheritance, income or gift taxes;
- Erroneous reports furnished by tax officials;
- Mistakes in recording legal documents;
- Deeds from, defunct corporations; and
- Unprobated wills.
How does title insurance protect against these hidden risks and defects? Title insurance defends you in a lawsuit attacking your title and either corrects the title problem or pays the insured’s losses up to the face amount of the policy. The policy also protects you after you sell the property for defects occurring prior to your ownership that cause a loss to a purchaser if the title was warranted by you.
The title policy guarantees that at the date the deed was filed for record placing title in the name of the insured, the title was free of defects apart from those “excepted to” in the policy. The policy does not guarantee an actual amount of land. It guarantees that there are no buildings or other improvements belonging to someone else located on the insured land when an acceptable survey is furnished to the title company.
The benefit of Title Insurance comes from the assurance you have as the owner that should any defects arise you are covered. These are the same assurances the lender needs in order to provide the financing on the property. The Mortgagee’s Policy protects the lender’s interest only so long as the loan is outstanding and only in the amount of the balance of the loan at any given time. The Owner’s Policy protects you up to the face amount of the policy during your ownership and after you have sold the property if you have warranted the property to your subsequent buyer.
Your property is the single biggest investment you may make in your life. Title Insurance offers you the assurance that the title to this investment is protected.
Editor’s note: Karl Hjelvik is the Vice President Internal Auditor at Los Alamos National Bank. He has been with LANB since 1996.
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