Is Title Insurance Necessary?

What title insurance covers and why it’s important.

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.

Due Diligence

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:

Mechanics Liens

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.

Easements

A third party may have the right to use the property for a specific purpose.

Encroachments

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.

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