DEFINITION of 'Title Insurance'

Title insurance is an insurance policy that covers the loss of ownership interest in a property due to legal defects and is required if the property is under mortgage. The most common type of title insurance is a lender's title insurance, which is paid for by the borrower but protects only the lender. However, owner's title insurance can be taken out as a separate policy and is paid for by the seller to protect the buyer's equity in the property.

BREAKING DOWN 'Title Insurance'

Title insurance protects both real estate owners and lenders against loss or damage that can occur due to liens, encumbrances or defects in the title to a property. This differs from normal insurance in that title insurance protects the insured against the potential event that someone else from the past has a legal claim on the property. Common insurance policies, such as car insurance or health insurance, only protect the insured against future events. Title insurance is meant to protect policyholders against claims. These claims can be another person trying to claim ownership on a piece of property, fraud or forgery of title documents, easements and other items outlined in the insurance policy.

Taking out Title Insurance

An escrow or closing agent initiates the insurance process after a property purchase agreement is signed. There are five major U.S. title insurance underwriters, and the agent or a lawyer normally recommends a title insurer.

There are two types of title insurance: lenders' insurance and owners' insurance. Almost all lenders require the borrower purchase a lender's title insurance policy to protect the lender in a situation where the seller was not legally able to transfer the title of ownership rights. A lender's policy only protects the lender against loss, but an issued policy means a title search has taken place, which can give some assurance to the buyer. However, title searches are not 100% infallible, hence the need for insurance. Owner's title insurance, therefore, is optional and is often taken out by the seller at the buyer's request to protect the buyer against the same issue of ownership rights.

Sometimes a lender's policy and an owner's policy are required to be bundled and purchased together. This ensures everyone involved is adequately protected.

Lack of Title Insurance

There are some cases where a property was originally purchased by two or more people and one of those people has lost contact with the other owner. The estranged owner can come back and claim his right on the property even after it has been sold. A lack of title insurance means the new owner has to take the full brunt of the potential damages in these situations.

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