Title Insurance Basics
What is Title Insurance?
Title insurance is an insurance policy that provides protection against financial loss resulting from defects in your real estate ownership rights that were unknown to you at the time you purchased the policy. Although it is usually used to insure "fee simple" ownership, any real estate interest can be insured, including easements, leases, and even life estates. If a covered claim arises after you purchase the policy, the title company will either defend the claim or pay you for covered losses up to the limits of your policy.
What does Title Insurance cover?
Like any other insurance policy, title insurance policies are very specific about the matters they do and do not cover. Examples of covered matters include:
- A lien arising because a previous owner failed to pay: a mortgage or deed of trust; a judgment, tax, or special assessment; or a charge by a homeowners or condominium association.
- A lien for labor and materials furnished by a contractor without your consent.
- Leases, contracts, or options on your land that were not recorded in the public records or otherwise disclosed to you.
- Undisclosed restrictive covenants affecting your property.
- Undisclosed and unrecorded easements not otherwise apparent on your land.
- A deed or other document in your chain of title was not properly signed, notarized, delivered, or recorded due to an error by a notary, county clerk, or previous owner.
- A deed or other document in your chain of title is invalid because of a forgery, fraud against the rightful owner, invalid power of attorney, a signature given under duress, or a signature by a person legally incompetent to sign it.
- A deed was signed by only one spouse in a common law marriage.
- A title defect arising from an improper prior foreclosure of the property.
- Ownership claims by undisclosed or missing heirs.
- A deed signed by a defunct corporation, or one that did not have proper authority to sell the property.
Examples of matters that typically will not be covered include:
- Defects that are created after the policy is issued.
- Defects that you create, or of which you had knowledge.
- Problems that arise because of your failure to pay your mortgage, or to obey applicable laws or restrictive covenants that were disclosed to you.
- Title insurance does not guarantee that you will be able to sell your property, or borrow money on it.
- Title insurance does not protect against fire, flood, theft, or any other type of property damage or loss.
Do I need Title Insurance?
Only you can make this decision, although in some cases you may not have a choice because your lender may require you to obtain insurance before loaning you money. In other cases Title Insurance will be a negotiable item in a real estate contract. When evaluating whether to purchase Title Insurance, you must consider the possible risks. What if your home had to be destroyed because it was built over an easement? How would your business be affected if deed restrictions prohibit the use of the property for commercial purposes? Do you have the time and money to litigate a title dispute through the court system, including any appeals? How will your finances be affected if you are unable to sell the property or borrow money against it?
Here's a real-life example of how title insurance can protect against problems you would never even imagine. In the 1920's, land in a Houston subdivision was subdivided into 55-foot-wide lots, but during construction the builders thought the lots were only 50 feet wide. As a result, each house was increasingly shifted to the east side of its lot. The mistake culminated in a lawsuit in 2001 between two neighbors over ownership of a 20-foot-wide strip of land. Five years later the case ended up before the Texas Supreme Court, and the title insurance company paid over $120,000.00 in litigation expenses before the case was finally resolved.
How much does Title Insurance cost?
The basic cost of a policy is a small percentage of the sales price of the property, as shown in the current rate chart. (Additional charges may apply for certain changes to the basic policy that may be requested by you or your lender.) The Title Insurance premium is a one-time expense that is paid when you purchase the policy, and your policy will provide coverage for as long as you and your heirs own the property. Note that because Title Insurance rates in Texas are regulated, the cost of a policy will be the same regardless of which title company you buy from.
Where do I get Title Insurance?
In Texas, licensed title companies may issue Title Insurance. Texas Title Insurance policies and premiums are standardized by the Texas Department of Insurance, which means that the policy wording and cost will be the same regardless of which title company you deal with. However, different title companies charge different fees for closing services, and may also describe their exceptions differently. You will also find differences among title companies in quality of customer service, experience, and financial stability. You are not required to use a title company selected by your lender or real estate agent.
When do I get Title Insurance?
A property owner can only acquire Title Insurance when closing on the covered property. The Title Insurance must be ordered prior to the closing to allow the title company time to generate the title commitment, and if necessary to allow the parties an opportunity to resolve any problems that might be discovered. Typically, the issue of whether a buyer will obtain Title Insurance and who will pay the premium is resolved while negotiating the real estate purchase contract.
My lender is making me pay for a mortgagee's policy. Won't that protect me?
Not necessarily. A mortgagee's policy only ensures that your lender has a valid, enforceable lien against your property. If a covered title defect arises that the title company cannot fix and you lose your land, a mortgagee's policy will pay money to your lender--not you. In addition, a mortgagee's policy will not cover matters that do not affect the validity and enforceability of the lien, such as restrictive covenants that limit how you can use your property.
Can I just do my own title search?
Yes, but bear in mind that you will need to be as thorough as an experienced title examiner. You will need to examine all pertinent records, including deeds, mortgages, wills, divorce decrees, bankruptcy filings, court judgments, tax records, liens, and maps. Also bear in mind that title insurance provides protection against certain defects, such as a forged signature or a deed signed by a minor, that may be impossible for you to detect from merely examining records. (Review the list above of "hidden" defects that may be covered by your policy.) Finally, consider the fact that if a title examiner misses a covered defect you can make a claim under your title policy; if you overlook that same defect you have no one to blame but yourself.
The current owner has had this property for years. Doesn't that mean the title is good?
Not necessarily. For example, a forged deed, missing heir, or erroneous legal description may take years to be discovered. It's also possible that the current owner incorrectly thinks that a prior defect (such as a tax lien or judgment lien) has been resolved when in fact it has not.
The current owner recently purchased the property and got Title Insurance. Doesn't that mean the title is good?
Not necessarily. It only takes a few minutes for a lien to be filed against land. In addition, coverage under the current owner's policy terminates when he sells the land. So, if you discover a title defect after closing that the prior owner's title company overlooked neither you nor the prior owner will have a claim.
I've hired a lawyer to review my documents. Is Title Insurance still useful?
Yes. An experienced real estate attorney can be helpful in ensuring that your documents are skillfully negotiated and properly drafted, but your lawyer probably will not perform a title examination unless you specifically request it. Because of the time required to make a diligent search the lawyer's fees for this service may actually be higher than the title insurance premium. Consider, too, that a reputable national insurance company will likely be in business long after your lawyer has passed away or ceased practicing law.
Does Title Insurance provide any benefit to the seller?
Absolutely. First, most buyers (especially when purchasing a home) want Title Insurance, so by offering Title Insurance you make your property more attractive to prospective buyers. Time really is money in real estate sales. A homeowner who can shave just 30 days off his closing date may well save enough in mortgage interest, taxes, and homeowner's insurance to offset the cost of the Title Insurance premium.
Secondly, as we explain in our article, About Deeds in Texas, a seller in a real estate transaction usually makes certain warranties to the purchaser, including a warranty that the seller is conveying clear title. If it turns out after closing that the seller did not have clear title the buyer may sue the seller for breach of warranty--even if the seller had no way of knowing the title defect existed! One of the most common ways for savvy sellers to protect themselves against this type of claim is to furnish the buyer with Title Insurance in exchange for the buyer's acceptance of a type of deed which limits the seller's liability. If a covered claim arises after closing, the buyer will then look to the title company, rather than the seller, for recovery. (Note, however, that a seller who has engaged in fraud or other intentional wrongdoing will likely not escape liability.)
Title Insurance offers valuable protection to real estate buyers, and to the lenders who finance those purchases. Compared to the other costs involved in most real estate transactions, Title Insurance is extremely affordable. While Title Insurance will not prevent or solve all title problems, but both the seller and the buyer will benefit from having this valuable protection if a long-lost heir or the common-law spouse of a former owner suddenly appears and claims an interest in the property. At the Killeen law firm of Roberts & Roberts, we deal with title companies and Title Insurance issues on a daily basis. If you need help with your real estate transaction, please call for an appointment.