Many people who are about to purchase a home or a commercial property ask why title insurance is needed if a title search has already been completed, especially in situations where the title searched did not disclose any title issues. Title insurance is an insurance policy issued by a specialized type of insurance company which guarantees that the title to a parcel of real property is clear and properly in the name of the title owner and that the owner has the right to transfer the property. Should a problem later arise with the title (some examples are described below), the insurance company will take steps to correct the problem, or if the problem cannot be corrected, the company will pay damages. Just as important, the title insurance company will cover the cost of legal fees necessary to resolve the issue.
Title insurance does not remove the necessity and desirability of searching title to property. Title insurance is designed to complement a title search, not to replace it. In fact, title insurance cannot be issued without a proper title search. The process still begins with a search of the relevant public records. In the course of this search, defects in the title are identified so that, to the extent possible, they can be eliminated. Title insurance is not a substitute for this process. It simply supplements the title search by providing financial backing to the insured in the event of a loss.
Title insurance also supplements a title search by protecting against issues a title search might not find. A title search can do no more than report on what is actually revealed in the public records available to the title searcher. Although attorneys and title searchers must rely on the public records, those records may not reflect everything. Such issues as missing wills or heirs, fraud, forgery and many other potential title defects are not disclosed by even the most careful and accurate search of the land records. By protecting against such non-record matters, title insurance offers to the insured protection beyond what even the most competent attorney or title searcher can provide.
The premium structure of title insurance is different than that of other forms of insurance. There is only a one-time premium charge for title insurance, and the protection afforded by the policy lasts for at least as long as the insured has an interest in the property. (In the case of an Owner Policy, the coverage will last even after the insured has transferred the property, as to any warranty covenants contained in a deed from the insured to the purchaser.) Other types of insurance, however, run for a specified period of time, such as year-to-year, and require annual payments.
There are generally two types of policies: owner policies and mortgagee, or lender, policies. The owner policy protects the owner of the property, while the mortgagee policy protects the lender who has agreed to provide financing to the owner of the property. Generally, the owner/borrower pays the title insurance premium for the mortgagee policy, as an element of the closing costs typically assumed by the owner. For this reason, owners tend to believe, albeit erroneously, that they have received title insurance coverage when buying a mortgagee title policy for their lender. To the contrary, the owner receives no title insurance protection unless he or she also purchases an owner title policy. In order to encourage the purchase of owner's coverage, many title insurers offer reduced rates when an owner policy and mortgagee policy are purchased simultaneously.
A new type of policy, however, offers additional protection to the insured, and is called an "expanded protection" policy. This type of policy insures against loss or damage suffered under a number of new and additional risks, e.g., forced removal due to the violation of zoning law, forced removal due to the failure to obtain a building permit, etc. Some lenders are beginning to require that an expanded protection mortgagee policy be issued, rather than a standard, "ALTA" mortgagee policy, given the additional coverage the new policies provide to an insured. The expanded protection policy is issued for an additional premium, given the additional risk shouldered by the title insurance company.