Chapter 5: Understanding Title Insurance Policies

Owner’s Title Insurance

Owner’s title insurance is a type of insurance that protects the property owner from financial loss or legal issues arising from defects or problems with the property’s title. Here’s a closer look at owner’s title insurance:

Purpose: The primary purpose of owner’s title insurance is to provide financial protection to the property owner in case there are undiscovered or undisclosed title issues that arise after the purchase of the property. It helps safeguard the owner’s investment in the property and provides coverage against potential losses resulting from title defects.

Coverage: Owner’s title insurance typically covers a range of title-related issues, including but not limited to:

Undisclosed liens or mortgages on the property

Forged or fraudulent documents affecting the title

Errors or omissions in public records

Invalid or improperly executed deeds

Boundary disputes or encroachments

Probate or inheritance issues

Cost and Premium: The cost of owner’s title insurance is typically a one-time premium paid at the time of property purchase. The premium amount is based on the property’s purchase price and may vary depending on the insurer and location. The coverage provided by owner’s title insurance lasts for as long as the owner or their heirs have an interest in the property.

Title Search and Examination: Before issuing owner’s title insurance, the insurer typically conducts a thorough title search and examination to identify any potential title issues or defects. This helps minimize the risk of future claims and ensures that the property’s title is clear and marketable.

Benefits: Owner’s title insurance provides several benefits to property owners, including:

Financial protection: It offers coverage for legal defense costs and potential losses associated with title issues.

Peace of mind: Property owners can have peace of mind knowing that their investment is protected against unforeseen title problems.

Transferability: Owner’s title insurance can be transferred to subsequent property owners, providing continued coverage and protection.

It’s important to note that owner’s title insurance is separate from lender’s title insurance, which is typically required by the mortgage lender to protect their interests. Owner’s title insurance is optional but highly recommended for property owners as it provides additional protection and coverage specific to their ownership rights.

Consulting with a title insurance professional or a real estate attorney can help you understand the specific terms, coverage, and benefits of owner’s title insurance in your particular situation.

Lender’s Title Insurance

Lender’s title insurance, also known as a loan policy, is a type of insurance that protects the mortgage lender’s interest in a property. Here are some key points about lender’s title insurance:

Purpose: Lender’s title insurance is typically required by mortgage lenders as a condition of granting a loan. Its primary purpose is to protect the lender’s investment by providing coverage against potential losses resulting from title issues that could jeopardize their security interest in the property.

Coverage: Lender’s title insurance covers the lender’s interest in the property and typically includes protection against:

Undisclosed liens or mortgages on the property

Errors or omissions in public records

Invalid or improperly executed deeds

Forged or fraudulent documents affecting the title

Inadequate property descriptions or survey-related issues

Cost and Premium: The cost of lender’s title insurance is typically a one-time premium paid by the borrower at the time of closing the loan. The premium amount is based on the loan amount and varies depending on the insurer and location. The coverage remains in effect for the duration of the loan.

Title Search and Examination: Before issuing lender’s title insurance, the insurer conducts a title search and examination to identify any potential title issues or defects. This helps minimize the risk of future claims and ensures that the lender’s security interest in the property is protected.

Protection for the Lender: Lender’s title insurance protects the lender’s investment in the property by providing coverage for legal defense costs and potential losses resulting from title defects. If a valid claim is made against the property’s title, the insurance policy will typically cover the lender’s losses up to the policy’s coverage amount.

Borrower’s Responsibility: It’s important to note that lender’s title insurance only protects the lender’s interest in the property. It does not provide coverage or protection for the borrower’s ownership rights or equity in the property. For that reason, it’s recommended that borrowers also consider obtaining owner’s title insurance to protect their own interests.

Lender’s title insurance is typically a standard requirement in mortgage transactions, and the cost is usually included in the borrower’s closing costs. It provides an added layer of protection for the lender, ensuring that their investment in the property is secure.

It’s important to consult with a title insurance professional or a real estate attorney to fully understand the terms, coverage, and benefits of lender’s title insurance in your specific situation.

Differences Between Standard and Enhanced Policies 

Standard and enhanced policies are two types of title insurance policies that offer different levels of coverage and protection. Here are the key differences between standard and enhanced title insurance policies:

Coverage: Standard title insurance policies provide coverage for common title issues such as undiscovered liens, encumbrances, and other defects in the property’s title. Enhanced title insurance policies offer broader coverage, including additional risks and potential issues that may affect the property’s title.

Additional Risks Covered: Enhanced policies typically provide coverage for a wider range of risks compared to standard policies. These may include coverage for boundary disputes, violations of building permits or zoning laws, encroachments, access rights, mineral rights, and other specific risks that are not typically covered under a standard policy.

Premium Cost: Enhanced title insurance policies generally have a higher premium cost compared to standard policies. The increased coverage and broader protection provided by the enhanced policy contribute to the higher premium amount.

Coverage Limits: Both standard and enhanced policies have coverage limits, which define the maximum amount the title insurer will pay out in the event of a valid claim. The coverage limits can vary depending on the policy and the insurer.

Optional Endorsements: Enhanced policies often come with optional endorsements that allow further customization of coverage based on specific needs or concerns. These endorsements may provide additional protection against specific risks or address unique circumstances related to the property.

Availability: While standard title insurance policies are more commonly offered and readily available, enhanced policies may have certain requirements or may not be available for all types of properties or transactions. Availability can vary depending on the insurer and the specific jurisdiction.

When deciding between a standard or enhanced title insurance policy, it is important to consider the specific risks associated with the property, the level of protection desired, and the budget for insurance premiums. Consulting with a title insurance professional or a real estate attorney can help you understand the differences between these policies and make an informed decision based on your specific circumstances.

Limitations and Exclusions in a Standard Title Policy

Standard title insurance policies typically come with certain limitations and exclusions that define the scope of coverage. These limitations and exclusions vary between different insurers and policies, but here are some common examples:

Known Defects: Title insurance policies usually do not cover defects or issues that are known to the insured prior to the issuance of the policy. This means that if the insured is already aware of a specific title problem or defect, it may not be covered under the policy.

Environmental Hazards: Standard title policies often exclude coverage for environmental hazards or contamination on the property. This can include issues related to soil contamination, pollution, hazardous waste, or other environmental liabilities.

Construction Defects: Policies may exclude coverage for construction defects or issues related to the quality of the property’s construction or improvements. This means that any problems arising from faulty construction, design defects, or poor workmanship may not be covered.

Native American Land Claims: Title insurance policies may exclude coverage for claims or disputes related to Native American land rights, tribal claims, or other similar issues involving indigenous land ownership.

Future Changes in Land Use: Policies may not cover future changes in land use regulations or zoning ordinances that could affect the property’s permitted uses or value. Changes in zoning that occur after the policy is issued are typically excluded from coverage.

Governmental Actions: Title policies may not cover losses resulting from governmental actions, such as eminent domain or regulatory takings, where the government acquires or restricts the use of the property.

Water Rights: Coverage for water rights may vary depending on the policy and jurisdiction. Some policies may exclude coverage for water rights disputes or issues related to water usage or access.

It’s important to carefully review the terms, limitations, and exclusions of a specific title insurance policy before purchasing it. Understanding what is covered and what is not can help manage expectations and determine if additional endorsements or specialized policies are needed to address specific concerns or risks associated with the property. Consulting with a title insurance professional or a real estate attorney is recommended to fully understand the limitations and exclusions in a standard title insurance policy and to explore additional coverage options if necessary.