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. Bad Title

    A title that does not grant ownership to its holder due to unsatisfied ...
  4. Clear Title

    A clear title is a title without any kind of impairment, lien ...
  5. Certificate Of Title

    A state or municipal-issued document that identifies the owner ...
  6. Absolute Title

    An absolute title is a title to a property that is free of any ...
Related Articles
  1. Personal Finance

    Car Title Loan Requirements

    Here's a list of what you need to qualify for a car title loan. Most important: having sole ownership of your car with no liens.
  2. Personal Finance

    How to Sell a Car With a Lien

    Vehicle owners wondering how to sell a car with a lien on the certificate of title have four options to both remove the lien holder and transfer ownership.
  3. Investing

    5 Common Methods of Holding Titles on Real Property

    Understand the common methods of holding title to real estate property so you can decide which method best meets your needs.
  4. Personal Finance

    States That Allow Car Title Loans

    Only some states permit car title loans – and those that do may have restrictions. Check this list to see what to expect.
  5. Investing

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  6. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  7. 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.
  8. Managing Wealth

    Tips For Transferring A House Title

    Transferring a house title can be complicated at times. Here are some guidelines to help you get through the process.
  9. Personal Finance

    Are Car Title Loans Ever a Good Idea?

    Most people knowledgeable about finance consider title loans predatory. What would constitute a good-quality short-term loan? Here's one idea.
  10. 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.
RELATED FAQS
  1. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
  2. What do real estate attorneys do?

    Understand the role of a real estate attorney, professionals specialized in legal matters related to property, to help you ... Read Answer >>
Trading Center