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Wednesday, March 09, 2005

Title Insurance

A policy of title insurance is a contract of indemnity between the insurance company and the owner of an interest in real property. In plain English, this means that in the event that the insured owner of an interest in the insured property suffers an actual or threatened monetary loss, due to a title defect or lien created prior to the effective date of the policy that is not excluded as an exception to the policy, the title insurer will defend the insured against a lawsuit attacking the title or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.

Title insurance differs in several respects from other types of insurance. Where most insurance is the contractual "coverage" where one party indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. Any issues found are either fixed before issuing the title policy or the coverage is specifically written to exclude those items. Title insurers typically pay a very low percentage of their premium revenue out in claims in a given year: industry averages are 5 to 10%.

Just as lenders require hazard (fire) insurance and other types of insurance coverage to protect their investment, most first lien lenders will also require title insurance as security for their investment in real estate. Junior mortgage lenders may depending on the amount of the loan choose to rely on a title search which typically provides less legal assurances to the lender than the full title insurance policy.

There are two basic kinds of title insurance:

Owner's policy - The owner's policy insures a purchaser that the title to the property is free from defects or encumbrances, except those which are listed as exceptions in the policy. It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party), if the property is found to belong to someone else, if there is no access to the land, or if there is some other defect or lien on the title. An owner's policy will specifically list what interest in the property is insured as of what effective date. The policy will also contain various standard exclusions to coverage and also specific exceptions to title that the title company is unwilling to insure. The amount of the Owner's policy is typically the purchase price. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state which is reflected in most real estate contracts. Consumers should be wary of real estate contracts which provide that they pay for title charges without having knowledge of what those charges are. A real estate attorney, broker or loan officer should provide detailed information to the consumer as to this "title" pricing issue before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy - In addition to the coverages provided on the owner's policy, this type of policy also insures the validity and enforceability of the lien of the lender's mortgage or deed of trust. The lender's policy protects the lender for the amount of money lent against the property. As the loan is paid down, the amount of coverage decreases, and once the loan is paid off, coverage under the policy terminates. The insurer's risk, therefore, under a loan policy is less than that of am owner's policy; as a result, insurers will charge lower premiums for a loan policy than would be charged for the same dollar amount of coverage on an owner's policy.

American Land Title Association ALTA is a national trade association of title insurers, ALTA promulgates standard forms of title insurance policy jackets for Owner's, Loan and Construction Loan policy forms. ALTA forms are used in most, but not all, states in the USA. ALTA also promulgates special endorsement forms for the various policies, endorsements amend and typically broaden the coverage given under a basic title insurance policy. Some states such as Texas and New York may require the use of their own forms of title insurance policy jackets and endorsements for properties located in those jursidictions. Title insurance pricing is regulated or fixed by state government in some states including Texas and Florida. Other states do not regulate title insurance premiums but instead rely on the marketplace to do so. Surprisingly, lower title premiums are generally found in the unregulated states.

Nonetheless, a wise consumer should shop for title insurance pricing and explore the issue of title insurance and closing costs with their attorney, real estate broker or lender in addition to the title insurance companies.


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