The land title transfer system in America works so well that most consumers never take the opportunity to learn how or why it works or understand the personal and societal benefits derived from this highly effective system of assurance.
However, when an individual sits at a closing table to sell one house and buy another, the main reason such a complex real estate transfer can be quickly accomplished is because an independent, third party title/settlement professional has already searched the public record (property records, tax records, and court records) to establish legal ownership of the property being sold, cured any title or public record defects (one-third of all transactions reveal a title or public record defect), accounted for and transferred all of the money intended to change hands, and insured the entire transaction against any mistake, fraud, risk or defect, whether it is known or unknown.
As a practical matter, this means that buyers are more willing to purchase property because they are insured against property fraud and defects in the public record. Lenders are more willing to make loans because ownership by the borrower of the collateral, or real estate, is guaranteed through title insurance. The secondary financial markets are willing to buy mortgage-backed securities because, in the event of a default, their right to the underlying collateral is assured.
Title companies and their agents are involved in completing all aspects of the closing process, from preparation of documents and recording instruments, to preparation of closing forms and collecting and disbursing funds. Before a transaction is completed, a title search of the records is made in an effort to locate potential problems so that they can be corrected and the transfer can proceed. While most problems can be located in a title search by skilled professionals, there can be hidden hazards that even the most thorough search will not reveal. Examples include forgeries in the chain of title, a claim by a previously undisclosed relative of a former owner, or a mistake in the public records, all of which can be covered by title insurance. Liens, easements, rights-of-way, life estates, air and subsurface rights, and future interests are also discovered in a title search and insured by a title insurance policy.
There are two types of title insurance. An Owner’s Policy protects the buyer’s interests while a Loan Policy protects the lender’s interest. An Owner’s Policy is typically issued in the amount of the purchase price, and remains in effect for as long as the owner or their heirs retain an interest in the property. In addition to identifying risk before a transaction is completed, the Owner’s Policy will pay valid claims and all defense costs against claims on the title. A Loan Policy assures the lender of the validity, priority and enforceability of its lien (mortgage) – serving as protection for the lender’s security interest in the property. A Loan Policy is issued in the amount of the loan, and liability decreases as the mortgage is paid off by the borrower.
Since the sale, purchase and transfer of real estate is governed by local law and custom, practices of the title industry vary by locality and are regulated by state governments. Who pays for the title insurance is also a matter of local custom. In some parts of the country, the seller purchases the Owner’s Policy for the buyer, in effect assuring them their title is clear, while in other parts of the country, both the Loan Policy and Owner’s Policy are issued simultaneously, and in still others, the buyer must ask for an Owner’s Policy and pay for it separately.
Title insurance is substantially different than other types of insurance coverage for two reasons: 1) it is paid by a one-time premium that provides protection for as long as the owner or their heirs retain an interest in the property and, 2) title insurance procedures seek to eliminate risk rather than simply price risk.