What title insurance covers and why it’s important
Title insurance can reveal any past problems that may arise when selling a property. While most types
of insurance policies protect against future events, title insurance protects against past events
from coming back to bite property owners
Terms such as “cloud on title” or “defective title” mean there are unresolved issues that could cause
confusion on the ownership of the property. Title insurance helps uncover potential problems such as
liens, foreclosures, inheritance issues, false deeds — anything that could lead to questions about
the legal ownership of a property.
Title Insurance Protects Rights to Ownership
Obtaining title insurance is an important part of conducting due diligence and a successful close of
escrow. Title proves that an owner has the right to possess a specific property and legally sell it.
The last thing a buyer or seller wants during a real estate transaction is for someone to challenge
the owner’s property rights. Every policy is based on the specific property, the terms of the
transaction, and the needs of the buyer and seller.
For commercial properties, there are title insurance policies for both lenders and property owners.
Owner’s title insurance protects the buyer from any disputes, while lender’s title insurance
protects the bank that financed the property.
It Starts With A Title Search
Before issuing a policy, the title insurance company will conduct a title search. This helps reveal
any liens or other encumbrance that could cause a third party to dispute the seller’s ownership
rights. If there are any unresolved matters, the title search will uncover it.
The Preliminary Title Report Tells The Story
After the title search is complete, the title insurance company issues a preliminary title report.
This shows the history of the property — mortgages, deeds, easements — everything that has been
recorded on the property. It also lists other information such as zoning, property tax information
and legal description of the property.
Next, the buyer and the seller will review the findings listed on the preliminary title report. This
provides the seller the chance to challenge any errors and address any problems with title. Equally
important, it gives the buyer opportunity to make sure the property claims of the seller match the
report. Once both the buyer and seller accept the Preliminary Title Report, it will become the final
report used for the title insurance policy.
Common Title Problems
With this in mind, the seller will need to resolve all title issues in order to provide a clear title
to the buyer so the property can legally be sold. To illustrate, here are some examples of common
title problems that a title report may bring to light:
Contractors or anyone who provides services for a property may file a lien on the property to make
sure they get paid for their work. Once the work is complete, they should remove the lien. Problems
often arise when the contractor has not filed the lien removal.
Child Support or Spousal Support Liens
When a divorced spouse does not remove a lien, it can show up decades later. Even if they have
resolved the issue, they must remove the lien in order to have clear title.
Unknown Beneficiaries or Co-Owners
If an owner has inherited a property from a trust, there may be other beneficiaries that would need
to sign the transfer of title. All owners must be identified and available to transfer the property.
A third party may have the right to use the property for a specific purpose.
The property might encroach on another owner’s land, or vice versa.
In the final analysis, a title insurance policy is the best protection against any unforeseen title
problems that may arise during a real estate transaction. For a relatively small cost, it helps
protect owners rights and remains in effect for as long as they own the property.