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How does title insurance work?
A title insurance policy is a contract of indemnity and it sets forth the terms and conditions of the contract. The following information is general in nature. Care should be taken to read the actual policy.
Title insurance policies are typically purchased and issued at the time a person purchases property or obtains a new mortgage loan. A buyer pays a one-time insurance premium at closing (or upon refinancing the property). The policy contains an “effective date” which is typically either the date that either the mortgage or the deed of conveyance was recorded in the local land records. Generally speaking a title insurance policy insures against events of record which occurred prior to the effective date of the policy. Events affecting title which occur after the time of your closing would not generally be covered, unless, of course, they were based on some defect in the title which existed prior to the effective date.
There are specific exclusions from coverage of the policy, these are set forth in the policy. Normally, items discovered during the title search that encumber the property will not be insured since they are already of record. For instance, most properties have one or more easements in favor of utility companies to permit the location of gas, electric, water or sewer lines, and these will be set out as exceptions in the title insurance policy.
Be certain to ask your attorney to explain these items to you in more detail and be sure that you purchase on Owner’s policy to protect your investment in your property.
Why buy title insurance?
Title insurance provides two major benefits to policyholders, provided that coverage is triggered. First, it will pay to defend the insured’s title against claims of third parties. Second, it will pay for loss or damage caused by a defect in title and suffered by the insured to the extent of the policy limits.
While most defects are discovered by a title search, there are a number of “hidden defects” which neither the seller nor the attorney examining the title would discover, but which could affect your title. Examples of these are lost, forged or incomplete deeds; deeds executed by incompetent persons; incorrectly indexed deeds in the land records; claims of Indian tribes; some permit issues (on Expanded Protection policies). Title insurance covers such potential problems.
What if I already own a home?
If you obtained a mortgage loan in order to purchase your new home, the lender probably required that you to purchase a title insurance policy in its name to insure the validity of its mortgage as a lien on your property. THAT POLICY DOES NOT PROVIDE ANY COVERAGE FOR YOU.
Owners desiring title protection must purchase a separate policy insuring their ownership interest. The essence of the owner policy is that it insures the owner against loss by reason of the status of the record title being other than as stated in the policy, subject, of course, to certain standard exclusions and exceptions relating to the particular property. Rates for owner title insurance policies are generally higher than for loan policies because of the higher risk and because the policy insures the entire value of the property rather than just the loan amount.
The current form of owner policy in general use is the 2006 American Land Title Association (ALTA) owner title insurance policy. Recently, the title insurance industry has introduced an optional, Expanded Coverage policy which is available at the same rate as the standard policy. This policy is based on the 1987 ALTA Residential Title Insurance Policy with additional coverage not contained in either ALTA policy.
Owners desiring to purchase title insurance now have the option to purchase the Standard or the Expanded form of coverage. The summary of the standard and expanded owner policies that follows provides general information about the coverage afforded by each policy. Care should be taken to read the policies.
What is a Standard Owner’s Policy?
This policy provides the basic coverage for persons desiring to protect their interest in the property.
It insures the following:
- You are the true owner of the property.
- There are no defects, liens or encumbrances other than those that are listed in the policy.
- The title you acquired is marketable and cannot be rejected by a subsequent buyer as being impaired by some defect that existed at the time you purchased the policy.
- You have a legal right of access to the property from a public street or private right of way.
- The company will defend your title if it is challenged and will pay costs, attorneys’ fees and expenses to defend you against any claims made against your title which fall within the coverage of the policy.
- Coverage increases by 10% each year for the first five years without additional cost.
- The coverage under both the Standard and Expanded Coverage policy continues in force for as long as you have an interest in the property or so long as you can be sued for having owned an interest in the property. That means that you are insured even after you sell the property if you have conveyed the title by warranty deed to the new owners. Should the subsequent owners later make a claim against you for a matter that is within the scope of coverage of your policy, the company will provide the protections listed above.
What is an Expanded Owner Policy?
Subject to possible deductions and limits of coverage (see the policy or ask your attorney for information on how to remove the deductibles and limits from your policy), this policy provides all of the coverage described in the Standard owner policy above plus the following:
- Use of the land for a single-family dwelling is not prohibited by zoning/recorded restrictions.
- There are no pre-existing leases, contracts or options to purchase affecting your title or easements affecting your property.
- No work or materials were provided to your property before acquisition for which a lien can be filed.
- You cannot lose title to your property through forfeiture or reversion because of a pre-existing violation of recorded restrictions.
- You cannot be forced to remove an existing structure on the property because of a violation of zoning or private restrictions or because no building permit was issued for the structure.
- There are no pre-existing violations of any recorded restrictions affecting your property.
- You have a legal right of access to the property by both foot and vehicle.
Other protection against loss include:
- Ownership claims of others based on forgery before or after acquisition of title.
- Claims to divest you of ownership because of a pre-existing violation of restriction.
- Claims of others to limit the use of your property based on a recorded restriction.
- Refusal to fulfill a purchase contract, lease or make a mortgage loan because of pre-purchase violation of restrictions.
- Someone else builds on your property.
- Inability to sell because of violations of subdivision laws.