What is Title Insurance?
Protecting purchasers against loss is accomplished by the issuance of a title insurance policy, which states that if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy.
Title insurance differs significantly from other forms of insurance. While the functions of most other forms of insurance is risk assumption through the pooling of risks for losses arising out of unforeseen future events (such as death or accidents), the primary purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.
In the United States a public records system is maintained that varies from state to state. In each and every county there is a public office where people may have their deeds or other written instruments relating to title recorded in permanent record books. The public records provide constructive notice to everyone as to the rights and interests of parties in a particular piece of property. There may be other rights and interests that are not disclosed by the public records (i.e., secret marriages, incompetence, unknown heirs, forgery, etc.). The public recording offices and their records constitute the most important source of information about title to real estate.
The offices in which these public records are maintained have different names in different states. In fact, there usually are several different offices in each and every county. One office may be for the recording of deeds, mortgages, and documents pertaining exclusively to land. Other offices in the same counties may contain the records of other matters affecting the title to the land. Lawsuits, marriages, divorces, insanity proceedings, and probate may all affect the title to the land. Still other offices may contain the records relating to taxes against the properties or, in some instances, recorded surveys.
Methods of Title Searching
There are various methods by which title to a parcel of real property can be examined.
- Direct Search
In some areas of the country, title companies or lawyers retained by the customer go directly to the county records when conducting a title search. In others, title companies maintain copies of those records in "title plants," which are located right in the company's offices. In some parts of the country, predominantly in the northeast, the counties' records are maintained in Grantor/Grantee books that index properties by seller's and buyer's names and are laborious to search. In some states, the county real estate records are indexed in a Tract Index similar to a title company's title plant. A tract index indexes properties by the property location, i.e., lot number, and if reliable, title companies may use them instead of going to the expense of building their own title plants.
- Title Plant Examination
The other method of title searching is called the Title Plant Examination. The title examiner makes the search from the company's title plant records. The plant contains a duplicate of the "public records", which has been reorganized and indexed in a more useful fashion. This means that once the searcher locates the property, the searcher has instant access to all instruments affecting that property. This method of title search has been used in most metropolitan areas since the advent of title insurance. It requires that the title insurer or its agent own a title or abstract plant.
- Title Examination
When the search is completed, copies of all pertinent documents, tax searches, name searches, etc., are sent to a title officer. It is the officer's responsibility to examine those items and arrive at a conclusion as to who owns the property and what encumbrances or defects exist. The officer may also set out certain requirements to clear up any problems disclosed by the search and examination.
The job of searching the public records to identify existing rights and interests is not an easy task. The title searcher or abstracter reviews the public records to find all aspects of title, which can be seen and recognized. From the title search, the title examiner produces an opinion of title, from which the Company will issue its insurance.
In many areas, the title to a property can be traced back to a royal grant, charter, or the United States government. In many areas, titles are not traced back that far; instead, local custom or title insurance company requirements dictate a shorter search.
There are few titles that have a perfect history from their source, or root, to the present day. Each transfer of ownership is a "link" in what is referred to as the "chain of title." As each transaction or link takes place, there is a potential for a problem. Even if the entire chain of title appears to be in order, the chain is still subject to interpretation. When searching a title, what we are trying to determine are the various rights and interests that make up each link in the chain as it has passed from one owner to another.
A "title" is composed of three basic elements.
• Rights and interests that are disclosed in the public records or by physical inspection of the property, i.e., deeds, mortgages, leases, etc., parties in possession, utility easements, etc.
• Rights and interests that are not recorded but exist, i.e., limitations imposed by laws and statutes, etc.
• Rights and interests that are hidden, i.e., forgeries, secret marriages and unknown heirs.
Every title is made up of many different "rights" and "interests" which may be owned by different people. The "owners" of the property own the most valuable of the property's rights and interests, but other people may also have rights to the property, such as easements for utilities or mortgages, etc.
Each title can be compared to sticks in a bundle. The rights and interests are represented by the sticks. The "owners" own what we call a "fee simple" title, that is, they have purchased the most vital and valuable sticks including rights of possession, use, occupancy, enjoyment, inheritance, etc. Also, within the bundle are sticks that may be owned by other parties. These are called encumbrances and may consist of easements, mortgages, liens, etc.
When a person purchases a parcel of real estate, it is not only the physical property itself that he or she acquires, but the sellers rights and interests, "the seller's title," in the property. It is essential for the prospective purchaser to know before the transaction takes place, precisely what rights or interests the seller can convey. The purchaser also needs to know who else may have rights or interest in the property, and about any encumbrances against the property that may affect the use or enjoyment of the land. The title search must cover all these rights and interests.
The Benefits of Title Insurance
Title insurance provides a broad range of benefits to the parties involved in a real estate transaction.
To the Purchaser of Real Estate
The purchaser of real estate needs protection against serious financial loss due to a defect in the title to the property purchased. For a single, one-time premium, which is a modest amount in relationship to the value of the property, a buyer can receive the protection of a title insurance policy - a policy that is backed by the reserves and solvency of the Company. A title insurance policy will cover both claims arising out of title problems that could have been discovered in the public records, and those so-called "non-record" defects that could not be discovered in the record, even with the most complete search.
A title insurance policy will not only protect the insured owner, but also that person's heirs for as long as they hold title to the property, and even after they sell by warranty deed. The Company will not only satisfy any valid claim made against the insured's title, but it will pay for the costs and legal expenses of defending against a title claim.
To the Lender
The overwhelming majority of mortgage loans made in the United States are made by persons who are acting in a fiduciary capacity - by savings and loan associations, savings banks, and commercial banks on behalf of their depositors, and by life insurance companies on behalf of their policyholders. Because they are lending other people's money (other people's savings or policyholder's funds) these lenders must be concerned with the safety of their mortgage investments.
A policy of title insurance provides a mortgage lender with a high degree of safety against the loss of security as a result of a title problem. This protection remains in effect for as long as the mortgage remains unsatisfied.
To the Seller
An owner of real property whose interest is insured by an owner's title insurance policy has the assurance that the title will be marketable when selling the property. The title insurance policy protects the seller from financial damage if the seller's title is rejected by a prospective purchaser. Also, when the seller conveys with "warranties," the seller is still protected if the buyer sues because of a breach of those warranties.
To the Real Estate Attorney
Title insurance enables the real estate attorney to provide the client with substantially greater protection than would be afforded by the attorney's opinion alone. The attorney's opinion is generally limited to recorded matters and the client can only recover from the attorney if the attorney is found to be negligent.
To the Real Estate Broker
The title insurance company and the real estate agent both seek to ensure that as many purchases as possible are closed to the satisfaction of all the principals in the transaction. From the broker's standpoint, the efficient and safe transfer of title will result in client satisfaction, increased prestige, and continued business. Apart from the security that title insurance offers, most brokers have experienced numerous instances in which title insurance personnel have enabled them to close transactions that otherwise would have been delayed.
To the Home Builder
By providing various title insurance services and information to the home builder, the title insurance industry can and does assist the builder in identifying and evaluating building and use restrictions, easements, etc., in removing title problems that may arise, and in facilitating prompt and needed disbursement of construction funds from the construction lender. All of these services ultimately rebound to the benefit of the buyers of newly constructed homes.
To the Community In General
Apart from the unique benefits title insurance offers to particular parties interested in a real estate transaction, title insurance companies can and do offer considerable assistance to public officials through the use of their "title plants" - the data banks of reorganized and indexed public records that are maintained by the Company in many areas of the country.
Much of the information contained in title plants is not readily available from other sources. This fund of information about the date of recent sales, representative sale prices, ownerships, area maps, use restrictions, surrounding properties, and a host of other matters pertinent to proposed projects, has helped representatives from all levels of government save countless hours and taxpayer dollars. In addition, title plant people frequently help recording officers correct errors they discover in public indices and records.