Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Title Insurance

Home buyers will often ask their Realtors why they need title insurance. Excluding investors whose business it is to purchase property more frequently, many people do not understand the value of title insurance, which ensures that the property being purchased is covered in case of defects in the title that are not detected during the preliminary title search.

Defects in Title

The term ‘defects in title’ sounds clinical and detached. In plain language, buyers need to make sure that the property they are buying is transferred legally so they do not end up in court in the future having to negotiate a settlement with another party.

For example, how does a buyer know if the seller actually owns the property he or she is selling? Could the property be part of a trust owned by more than one person? Could there be a lien against the property because the seller failed to pay taxes?

Real property is the most expensive investment most people will make in their lifetimes and these are questions that should be answered before a transaction closes. This type of insurance is important because at least one third of all title searches discover defects in title that are fixed by title professionals before closing.

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Risks Without Title Insurance

But suppose a buyer decides not to have an Owner’s Policy and a defect was missed on the preliminary title report? What happens if there is a claim against the property after the transaction closes perhaps triggered by the sale an adjacent property? How many buyers would be able to defend their property rights in court if necessary? How would they know if the claim was real or bogus?

Title insurance coverage includes problems that arise with:

  • Forged documents that transfer titles
  • Forged mortgages
  • Forged satisfaction of release of mortgages
  • Consequences of a divorce not properly completed
  • Impersonation of true owners of property
  • Fabricated power of attorney

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If any of these situations occur, title companies will use their resources to settle the matter up to a certain amount, which means that, depending on the situation, buyers may have some out-of-pocket costs.

Some policies might reimburse policy holders for their expenses, for example, if they need to hire an attorney. So, it is a good idea for buyers to read their policies carefully and ask questions at the time of purchase.

Confusion occurs because there are two types of polices, one for the lender (if applicable) called a Lender’s Policy and one for the buyer called an Owner’s Policy. As their titles suggest, a lender’s policy protects the lender and not the buyer and the Owner’s Policy covers the buyer and not the lender.

Lenders can require that the seller purchase a Lender’s Policy, but it is not as comprehensive as the Owner’s Policy, which will cost more because it is priced based on the market value of the property rather than the loan amount.

Buyers should be careful. A buyer might think that an Owner’s Policy has been issued because he is looking at a preliminary title report. But a preliminary title report does not take the place of an Owner’s Title Policy. It is a good idea for buyers to ask to see a copy of their Owner’s Policy to make sure it is not a preliminary title report.