Definition
Title insurance is an insurance policy that protects against certain losses caused by defects in title—such as undisclosed liens, recording errors, or competing ownership claims—that exist as of the policy date (typically the closing date). Unlike most insurance, title insurance primarily addresses past risks rather than future events.
Owner’s Policy vs. Lender’s Policy
- Owner’s title policy: Protects the buyer/owner’s equity and ownership rights, generally up to the purchase price. It remains in effect as long as the owner (or heirs) have an interest in the property.
- Lender’s title policy: Protects the lender’s security interest (the loan balance). Most lenders require this policy in financed transactions.
What Title Insurance Can Cover
Coverage depends on the policy form, endorsements, and specific exceptions, but common covered items include:
- Undisclosed liens or prior mortgages not properly released
- Recording or clerical errors in public records
- Fraud, forgery, or impersonation in prior conveyances
- Unknown heirs or defective signatures (e.g., missing spouse signatures where required)
- Some access issues (often via endorsements)
Common Exclusions and Exceptions
Title policies typically exclude or list exceptions for items like:
- Survey matters: boundary disputes or encroachments (unless you obtain a survey and endorsements)
- Unrecorded matters: tenant rights not of record, unrecorded easements, or off-record agreements
- Governmental regulations: zoning, land use, and building code compliance (not title defects)
- Known issues: defects disclosed in the title commitment or accepted by the insured
How It Fits Into Due Diligence
Title insurance is not a substitute for diligence—it is the backstop. The title company issues a title commitment (pre-closing) listing requirements to close and exceptions that will remain. Investors typically pair the commitment with a survey and request endorsements that match the business plan (access, contiguity, zoning-related endorsements, ALTA survey coverage, etc., as applicable).
Why It Matters to Investors
- Capital protection: reduces the risk of catastrophic loss from hidden title defects.
- Financing support: lender policies are usually mandatory; owner coverage is often prudent.
- Exit liquidity: clean, insurable title improves marketability at sale.
- Risk allocation: identifies which issues must be cured versus accepted and priced.
Practical Example
After closing, a previously unknown heir asserts an ownership claim based on a defective prior conveyance. If the claim is covered, the title insurer may defend the insured’s title and pay covered losses up to the policy limit, subject to terms and exclusions.