Title Insurance

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.