Author: Melissa C. Martorella, Esq.
When it comes to the subject of title insurance, there is plenty of confusion. The average person has heard of title insurance yet does not fully understand the subject and why it is so important.
A Plain Terms Definition of Title Insurance
Title insurance is like other forms of insurance in that it provides protection. This form of insurance takes the form of a contract that safeguards against potential losses that have the potential to result when a property’s title is not completely free and fully clear of all potential roadblocks. Examples of such defects include encumbrances, liens, and other problems that were not known when the title policy was originally provided.
Title insurance is also important in that it provides a loan priority guarantee. The policy’s terms define risks that are excluded and covered. The insurer of the title provides reimbursement for losses covered up to the policy amount as well as those tied to legal expenses. Such protection proves effective as the policy issue date and provides coverage for defects that arose prior to establishing ownership.
Who Does Title Insurance Protect?
Title insurance protects homeowners and lenders. If another person or party were to challenge the title to the property through a supposed title defect that was unknown when the home was purchased yet arose at a point down the line while owning the home, the title insurance policy would prove applicable.
The title insurance policy has provisions for loss payment that stem from a claim that is covered. The policy also pertains to legal fees applicable if someone else claims the property as their own.
What Does Title Insurance Cover?
Standard title insurance policies insure against defects in the title that are found after the public record is examined. Such defects can range from recorded liens to unpaid taxes and other encumbrances. Extended policies are sometimes favored as they provide expanded coverage that extends well beyond the standard policy and insures against the defects noted above.
Optional endorsements to title insurance are available at an additional cost. Optional endorsements adhere to risks not covered in the standard or extended title insurance policies. Endorsements are helpful in that they kick in to provide coverage against:
• Covenant enforcement
• Liens for environmental protection
• Restrictions and conditions
• Water damage
• Boundary accuracy
How Much Title Insurance is Really Necessary?
The policy coverage should pertain to 125% of the amount of the loan. The logic in raising the policy coverage beyond the loan limit is that there is the potential for the indebtedness to be greater than the insured amount. Adding on an additional 25% sets the stage for a larger claim payment.
As an example, consider a situation in which the loan amount is $200,000. If the loan amount were insured 100% at a value of $100,000, and protective advances and accrued unpaid interest amounted to $40,000, there would be a significant loss. This is precisely why it is best to insure title policy coverage at 125% of the amount of the loan. In the example above, the title policy coverage should be $250,000, meaning there will not be a financial loss if the coverage is tapped into.
• Title insurance is essential for all property owners.
• Title insurance should be set at 125% of the amount borrowed.
• Sweating the small stuff such as the lack of notarization, signature issues, and other details can cause closing delays.