What is 'Title Insurance'

Title insurance is indemnity insurance that protects the holder from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender's title insurance, which the borrower purchases only to protect the lender. Owner's title insurance, paid for by the seller to protect the buyer's equity in the property, is available separately.

BREAKING DOWN 'Title Insurance'

Title insurance protects both real estate owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property.  Unlike traditional insurance, which protects against future events, title insurance protects against claims for past occurrences. Such claims include property ownership by another person, fraud or forgery of the title documents, unidentified easements, outstanding lawsuits, liens against the property, et al.

Purchasing Title Insurance

An escrow or closing agent initiates the insurance process upon completion of the property purchase agreement. There are five major U.S. title insurance underwriters, of which the agent or attorney typically recommends one.

There are two types of title insurance: lenders' insurance and owners' insurance. Almost all lenders require the borrower to purchase a lender's title insurance policy to protect the lender in the event the seller was not legally able to transfer the title of ownership rights. A lender's policy only protects the lender against loss. An issued policy signifies the completion of a title search, offering some assurance to the buyer. 

Since title searches are not infallible and the owner remains at risk of loss, there is a need for additional protection in the form of an owner's title insurance policy. Owner's title insurance, often purchased by the seller to protect the buyer against defects in the title, is optional.

Often, a lender's policy and an owner's policy are required together to guarantee everyone is adequately protected. At closing, the parties purchase title insurance for a one-time fee. To prevent abuse, the Real Estate Settlement Procedures Act (RESPA) prohibits sellers from requiring purchase from a specific title insurance carrier.

Risks of No Title Insurance

Having no title insurance exposes transacting parties to significant risk in the event a title defect is present.  Consider a homebuyer searching for the house of their dreams only to find, after closing, unpaid property taxes from the prior owner.  Without title insurance, the financial burden of this claim for back taxes rests solely with the buyer.  They will either pay the outstanding property taxes or risk losing the home to the taxing entity.  Under the same scenario with title insurance, the coverage protects the buyer for as long as they own or have interest in the property.

RELATED TERMS
  1. Chain Of Title

    Chain of title is the official ownership record of a property ...
  2. Cloud On Title

    A cloud on title is any document or encumbrance that might invalidate ...
  3. Clear Title

    A clear title is a title without any kind of impairment, lien ...
  4. Quiet Title

    Quiet title is a lawsuit filed to establish ownership of real ...
  5. Title Binder

    A title binder is a temporary form of real estate insurance coverage ...
  6. Title

    A title is the right to the ownership and possession of any item ...
Related Articles
  1. Personal Finance

    Asset Protection for Same-Sex Couples

    For same-sex couples, asset protection can be more challenging, but it is still possible using these methods.
  2. Insurance

    Bundle Your Insurance for Big Savings

    Bundling your insurance can save you money and time. Read on to see how to get the most out of multi-line insurance discounts.
  3. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  4. Investing

    10 Hurdles to Closing on a New Home

    A home will probably be the biggest purchase of your life - find out what can go wrong before you even close the deal.
  5. Insurance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  6. Managing Wealth

    How You Can Protect Assets With Umbrella Insurance

    Here's why protecting your assets from litigation via umbrella liability insurance is a good idea.
  7. Personal Finance

    Understanding escrow

    Are you in the process of buying a house? Here is everything you need to know about the escrow process, a step-by-step guidance of buying a home.
  8. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center