Why do I need title insurance?” This is a question that often comes from first-time home buyers or buyers who are moving here from other states that might handle searching the title differently than we do here in California. It is not an inexpensive part of the closing costs, but it is a very important one. Remember, title insurance is just that: insurance that you are receiving clear title to your new home.
Before title insurance was introduced, buyers in real estate transactions bore sole responsibility for ensuring the validity of the land title held by the seller. If the title was later deemed invalid or found to be fraudulent, the buyer lost his or her investment. That possibility is eliminated today thanks to the notion of clear title.
What does “clear title” mean? The title and escrow company that is handling the deeds and money in your purchase transaction have a legal department and a title department that literally research the history of ownership on the property in question, as well as search county recordings for any liens on the home. Liens can range from simple loans to unpaid workers, unpaid garbage bills, unpaid taxes of all kinds, legal judgments that are attached to the property, and much more.
The research will also turn up any encumbrances and restrictions (some can actually be a benefit to the property). You will want the research to turn up anything that needs to be paid or cleared from title when you take ownership. In most cases, these discovered items are paid through escrow from the seller’s proceeds.
What if there are “hidden hazards” that even diligent research does not uncover? These can include misstating marital status, mental incompetency, claims by a legal spouse, fraud, forgery, defective deeds, clerical errors in the records, or confusion due to similar or identical names.
These hidden hazards can show up even after you have purchased the home and jeopardize your right to ownership. That’s where title insurance comes in.
Title insurance is your policy of protection against loss if any of the problems covered by your policy — even a hidden hazard — result in a claim against your ownership. If a covered claim is made against your property, title insurance will, under the terms of the policy, assure you protection against your actual loss (not to exceed the amount of the policy). This might include providing legal counsel or payment of a loss to you or a third party.
In an extreme case, you can lose your entire property and still be liable to pay the balance on your mortgage. Most claims aren’t that dramatic, but even a small claim can cost you time and money, not to mention aggravation. When getting a loan on the property, the lender will require you to get an additional lender’s title policy to insure them (and you) for the loan balance.
Some people ask “Won’t an attorney’s opinion show property limitations or restrictions?” The answer is “maybe.” They will show items found in public records but they may contain errors. This would not disclose hidden hazards, and it is not an insurance policy to protect you in the case of a claim. If something were to turn up later, you would not have insurance.
Title insurance is but one component of a real estate transaction. The process of buying or selling a home is complicated; there are many forms to fill out, and many regulations and laws requiring adherence. This should come as no surprise, of course. Whether buying a pied-à-terre or a penthouse in a luxury tower, there is always a lot of money at stake, and there is simply no margin for error. This is in part why real estate agents are invaluable. We’ve been through it before. We know what’s required, and why it matters.
Our purpose is not to scare you. Quite the contrary, we want to provide you with a sense of confidence about the whole purchase or sale. Our intention is to take all the mystery out of the transaction and guide you through the process accordingly.
I hope this column has convinced you how important title research and the insurance policy is as part of your purchase. I sincerely hope you will never have to use the insurance, but it does offer peace of mind, as do other types of insurance. If you would like more information on title insurance, please feel free to contact me.