What is Title Insurance and Do You REALLY Need It?
Like all other forms of insurance, the primary purpose of title insurance is to shift risk from one party (the home buyer) to another (the title insurance company) in exchange for a fee. However, unlike other forms of insurance, such as home, auto, or life insurance, the premium for title insurance is only paid once at the time of your closing.
Title insurance protects homeowners against losses resulting from matters affecting their title to real property. If you're buying your home with a loan from a bank, then chances are that the lender will require you to purchase a lender's policy that will only protect their interests. The good news is that buying an additional owner's policy is usually incredibly cheap, if you do so at the time that you purchase the lender's policy.
So what type of protection does title insurance provide? In a nutshell, it provides protection from any types of challenges to your right to enjoy your property without interference from others. For example, if your next door neighbor comes over to tell you that the awe-inspiring $80,000 infinity swimming pool that the previous owner had built in your new home is actually on your neighbor's land, your title insurance company would have to step up to defend your interests in court. This means that they'll cover all legal fees and should you end up suffering a loss as a result of any claims or actions, they will reimburse you up to the limits of your policy. Another example would be if someone comes out of the woodwork claiming that they have an ownership interest in your property.
This is especially true in today's real estate market that is saturated with bank owned foreclosures. As we saw in the news over the past few years, numerous legal challenges were popping up against lenders from borrowers who had defaulted on their loans, but who asserted that the lenders did not follow the law in executing the foreclosure process. If a lender forecloses on a property that is owned by more than one individual and they fail to serve the proper notice on ALL of the owners of record, the missing party could come back to file a claim later.
In the State of Connecticut, title insurance must be purchased from an attorney that handles real estate closings and there are a couple of difference coverage levels (standard & expanded):
The standard policy provides the basic coverages for persons desiring to protect their interest in the property. It insures the following:
- You are the true owner of the property.
- There are no defects, liens or encumbrances other than those that are listed in the policy.
- The title you acquired is marketable and cannot be rejected by a subsequent buyer as being impaired by some defect that existed at the time you purchased the policy.
- You have a legal right of access to the property from a public street or private right of way.
- The company will defend your title if it is challenged and will pay costs, attorneys' fees and expenses to defend you against any claims made against your title which fall within the coverage of the policy.
The expanded policy provides the coverages described in Paragraphs 1 through 5 of the standard owner policy description, plus the following coverages:
- Use of the land for a single-family dwelling is not prohibited by zoning/recorded restrictions.
- There are no pre-existing leases, contracts or options to purchase affecting your title or easements affecting your property.
- No work or materials were provided to your property before acquisition for which a lien can be filed.
- You cannot lose title to your property through forfeiture or reversion because of a preexisting violation of recorded restrictions.
- You cannot be forced to remove an existing structure on the property because of a violation of zoning or private restrictions or because no building permit was issued for the structure.
- There are no pre-existing violations of any recorded restrictions affecting your property.
- You have a legal right of access to the property by both foot and vehicle.
- Protection against loss involving: a) Ownership claims of others based on forgery before or after acquisition of title; b) Claims to divest you of ownership because of a pre-existing violation of restriction; c) Claims of others to limit the use of your property based on a recorded restriction; d) Refusal to fulfill a purchase contract, lease or make a mortgage loan because of prepurchase violation of restrictions; e) Someone else builds on your property; f) Inability to sell because of violations of subdivision regulations.
As you can see, there are countless ways in which title to your new home may be adversely affected, so getting a title insurance policy is good common sense, especially since the purchase of a new home represents the biggest single investment that most people will make in their life!
- Mike Gregor | Realtor®