Why You Need Title Insurance

Owner’s Title Insurance protects against financial loss caused by covered title risks. The title insurer, without expense to you, will defend you against an attack on the title to your property as insured. For a one-time premium, an owner’s title insurance policy remains in effect as long as you, or your heirs, retain an interest in the property.

What Is Title Insurance?
Title Insurance insures owners that they are acquiring marketable title to the property. Unlike casualty insurance policies which insure against future events, title insurance is designed to eliminate risk or loss caused by title defects from past events. Title insurance provides coverage only for title problems that were in existence at the time the policy was issued.

A title insurance policy is a contract of indemnity that guarantees that the title is as reported. If it isn’t, and the owner is damaged at a later date, the title policy covers the insured for loss up to the face amount of the policy.

Here are just a few of the most common hidden risks that can cause a loss of title or create an encumbrance on the title:

Forgeries

False misrepresentations

Inadequate legal descriptions

Delinquent taxes

Undisclosed heirs

Lost wills

Mistakes in recording legal documents

Errors in tax records

Mistakes in the law

Clerical mistakes

Documents executed under duress

Illegal trusts

Defective Acknowledgements

Deeds by minors

Misinterpretation of wills

Undisclosed or missing heirs

Deeds to and from defunct corporations

Marital rights of spouse allegedly, but not legally, divorced

Deeds by persons supposedly single but secretly married

Deeds from persons not competent to handle their affairs

What Is A Title Search?
Issuing a title insurance policy is an extensive and exacting process. Title insurance companies work to eliminate risks by performing a painstaking search of the public records, or the title company’s own “plant”, where public records, laws, and court decisions pertaining to the property and the parties to the escrow are maintained. This is done to determine the current recorded ownership, recorded liens or encumbrances, and other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a Preliminary Title Report detailing the current status of title.

What Is A Preliminary Title Report?
A Preliminary Title Report contains vital information which may affect the willingness and the ability of the parties to close an escrow. Information includes ownership of the subject property, the manner in which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property, as well as a legal description of the property and an informational plat map.

The Preliminary Title Report indicates the type of title insurance to be offered by the title company, and the exclusions and exceptions from coverage based on the type of title insurance policy the company intends to issue. Exclusions and exceptions can include items such as: recorded deeds of trust, easements, agreements, and covenants conditions and restrictions, commonly referred to as CC&Rs.

What Should Be Looked For In A Preliminary Title Report?
As your real estate representative, we will review the Preliminary Title Report as soon as it is issued, paying particular attention to the following items:

Verifying the ownership vesting by insuring that the names on the report are the same as the names on the purchase contract. Sometimes the name of an unexpected owner will appear (i.e. a previous spouse or relative who died), and corrective documents may be required.

Verifying that the property address, the plat map, and legal description all match. An owner could own two properties adjacent to, or across the street from, each other, causing confusion in identifying the correct property.

Reading the informational notes for pertinent items about the property, such as: transfer taxes, monument fees, homeowners’ association fees, etc.

Carefully reviewing the exceptions. Common exceptions include: current taxes, bonds, deeds of trust, Mello-Roos Assessment District items, CC&Rs, and easements. Be sure the CC&Rs or existing easements don’t interfere with the buyer’s future plans. For example, an easement across the backyard could have a profound effect on the buyer’s ability to add a swimming pool at a later date.

Always looking for surprises. If you can’t locate an easement, or an unexpected deed of trust shows up, or you see an item you weren’t aware of before, immediately call the escrow officer or title company to discuss the matter. The title company should be a problem solver, and top-notch escrow officers and title companies go out of their way to resolve quickly the majority of “red flag” items. However, the responsibility for early detection and resolution of problems falls on the entire escrow team, including the agents, the escrow and title company, and sometimes the buyers and sellers as well.

What Is Covered?
Not all risks can be eliminated by a title search, since certain “hidden defects”, such as forgeries, identity of persons, incapacity, incompetency, and failure to comply with the law, cannot be disclosed by an examination of the public records. While the Preliminary Title Report is an offer to insure under certain circumstances, the Title Insurance Policy is a contract, providing coverage against such “hidden defects.” In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense for future claims against the property.

Extended owners’ and lenders’ policies of title insurance provide broader coverage and are available through the American Land Title Association (ALTA). Coverage is extended to certain matters that are “off-record”, but which are generally discoverable by an inspection of the property or by questioning the parties in possession. These include:

Unrecorded liens and encumbrances

Unrecorded easements

Unrecorded rights of parties in possession

Encroachments, discrepancies, or conflicts in the boundary lines

ALTA policies are available for owners and lenders, and a “plain language” ALTA Residential Policy is also available for residential property containing one to four units.

Agents, buyers, and sellers should not assume that all title insurance policies and title companies are the same. They aren’t, and it is important to ask questions of your title company to determine the type and cost of coverage available.