What is Title Insurance?
Title insurance is primarily concerned with risk elimination. The usual risk type of insurance policy is designed to protect against the possible happening of a known and designated future event, such as fire, accident or death. The title policy, however, is designed to state a fact, the quality of ownership of real property, or other interest as of a specific moment in time.
In attorneys’ opinions, the attorney reviews the abstract, renders his opinion of the quality of the title, and advises his client whether he should proceed with the transaction. The only liability to the attorney would be based in malpractice and no liability would befall the attorney as long as he used ordinary knowledge and reasonable skill.
Neither the abstractor nor the attorney would be held liable fro those numerous “pure” title losses which are not discoverable by searching the land records. Examples of such uncovered losses are: forged documents, the incapacity of a grantor or mortgagor, undisclosed heirs, missing heirs, missing signatures, or interest defective recording, mistakes in recording, unrecorded or unknown creditors, or others interested in the land, and access to the land.
A Title Insurance Policy insures all of these examples, and many more.
Title Insurance Documents
There are three basic types of title insurance documents: the Commitment, the Owner’s Title Policy, and the Loan Policy.
The COMMITMENT is a title insurance document and commits the company to insure. It reflects matters that appear on the record title as of the effective date and time: 8:00 AM- which may or may not appear in the final policy (i.e. mortgages, easements, liens, restrictions etc.) as well as setting forth the requirements which must be met before the final policy is issued.
The effective date of the Commitment is the last day through which the title has been run and expires by lapse of time, six months from the effective date, if no title insurance has been issued.
The OWNER’S POLICY insures the owner’s interest in the property being insured. The policy becomes effective as of the date and time the deed is recorded with the registry of deeds and insures as of that moment the owner has (1) title to the property of a kind as shown in Schedule A; (2) legal access to the property; (3) marketable title to the property; and, (4) that the property is free of all defects, liens, or encumbrances. All of these insurances, however, are the subject of other terms and provisions of the policy.
The LOAN POLICY insures the bank or lending institution’s interest in the property being insured. The policy insures that the lien of the mortgage is enforceable and that the insured lender has a valid, priority lien on the property. As in the Owner’s Policy, the insurance under the loan policy are given subject to other terms and provisions of the policy.
It has often been questioned: “Why does the owner need a policy of title insurance if the bank already has one?” The answer is primarily, that the loan policy covers only the lender’s interest, not the owner’s. An example would be: A neighbor discovers that the insured’s garage is too close to his property and sues him because the garage violates the side lot building restriction lines.
Upon determination of a valid claim under a policy of title insurance,
The owner would be:
- Defended by the Company.
- Reimbursed for legal fees and costs.
- Compensated for any loss he may sustain.
The lender would not have to be defended because no loss has been sustained with respect to the lien or priority of the mortgage.
Of course, coverages are not just given without qualification in policies of title insurance; they are given subject to other matters in the policy. These matters are set forth in:
- The exclusions from coverage (matters which the company does not insure; i.e. zoning, policy power, eminent domain, etc.)
- The conditions and stipulations (the delineation of the obligations and responsibilities of the parties referred to in the policy.)
- Exceptions (encumbrances as disclosed by an examination of title which are reflected on schedule B of the policy).
All policies of title insurance are issued for a one-time premium and are valid as long as the insured owner or his heirs hold title to the property, in the case of the owner’s policy; and as long as the mortgage is a lien of record in the case of the lender’s policy.
Many times (particularly in commercial transactions) a lender or owner may require seeing a policy in its drafted final form prior to closing.
The Commitment reflects the status of title as of the date of issuance. However, the agent may comply with the request of the lender/ owner by issuing a copy of the final policy marked “specimen or sample” and deleting those references to outstanding mortgages and/or other liens which will be discharged prior to closing.
However, the agent must make note to his client by cover letter or some other means that there are outstanding matters of record that must be discharged or released prior to issuance of the final policy.
The specimen policy, unlike the commitment is not binding on the company. It is simply issued as a courtesy to the insured, however, reliance upon the information shown is foreseeable hence, accuracy is important, as well as, a cover letter.