Today I want to give you a better understanding of how title insurance works. Sellers are required by the Real Estate Purchase Contract to provide clear and marketable title to the buyer with a policy of title insurance. It is wise for every buyer and seller to make sure the title to the property is protected by title insurance. This is particularly true for the seller if a warranty deed is used to convey title.

An Abstract of Title or Chain of Title (Title Report) is a chronological summary or history of all recorded events that have affected the title of a particular parcel of property, thus showing a linkage from the present owner back to the original source of title.

An Attorney’s Opinion, or certificate of title, is an evaluation of who the true owner of the property is. It usually carries no guarantees.

Subrogation. Title insurance functions under the process of subrogation. This is the substitution of a third party, the title company, in place of the grantor of the title. The title insurance company assumes the liability of the owner and/or exercises the owner’s rights if a court case should become necessary.

In most sales, two title policies are obtained to close the sale.

A. The sellers obtain a policy to insure that they are passing clear and marketable title to the buyer as they committed to do in the Real Estate Purchase Agreement. The coverage is almost always for the full value of the purchase price.

B. The buyer/borrower obtains a policy to insure the lender that the property has no liens or encumbrances that would cause the lender to refuse to give the loan. This policy is usually limited in its coverage to the amount of the loan.

C. Both policies are paid for in full and take effect at closing.

Types of Title Insurance Policies

A. Standard Policy: a comprehensive examination of recorded documents to determine defects in the title.
• The amount of the policy is for the full sales price.
• It insures against all recorded defects that are not identified in the insurance policy.
• The insurance is good from the date of the policy backward in time to the patent deed.
• It insures that all parties are competent and that signatures are valid.
• It does not include an on-site inspection.

B. Lender’s or ALTA Policy: includes all of the coverage of a Standard Policy.
However, it has some differences and some additional coverage.
• The policy is valid for only the amount of the loan, rather than the full value of the property.
• It covers defects that would be discovered by an on-site inspection of the property or a survey.
• A lender’s policy is assignable to subsequent holders of that same loan.

C. Extended Owner’s Policy
• It is used by the buyer/borrower.
• An extended policy does not make exceptions for defects that could have been determined by an on-site inspection of the property.
• This type of policy is non-transferable.

D. Plain Language Policy
• Available since 1987
• Covers mechanic’s liens
• Often costs no more than the standard policy
• As a buyer you should be sure to request this policy.

G. Title insurance is a one time fee for both buyer and seller, and is paid at the closing of the transaction.