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What is Title Insurance?
The most common policies are the Owner’s Policy and the Mortgagee’s Policy
Lender's or Mortgagee’s Policy or MTP
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A policy of title insurance is a contract of indemnity between the insurance company and the owner of an interest in real property being insured, such as a home, office building, condominium, or shopping center. In the event that the insured suffers a monetary loss due to a title defect or lien (including unpaid and past due taxes), which is not excluded as a coverage exception, the Title Insurer will defend the insured against a lawsuit attacking the title or reimburse the insured for the actual monetary loss incurred, up to the amount of the policy. The real estate interests typically insured are fee simple ownership and mortgage lien, through the “Owner’s Policy” and “Mortgagee’s Policy”, respectively; however, title insurance can be purchased to insure any interest in real property including easements, leases and life estates.
Title insurance is different from most other types of insurance. Whereas most insurance is the contractual "coverage" in which the Insurer indemnifies or guarantees a consumer or business against specific types of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies mitigate such risk of loss by searching public records to develop and document the chain of title in order to assess the existence of adverse claims against the subject property. Any defects revealed are either corrected, or “cured,” before issuing the title policy or such policy excludes those adverse items from the coverage provided under the policy.
Upon completion of its title examination and preparation of an Abstract of Title, a title company will typically issue a title commitment, which constitutes a promise to insure the title subject to the terms of the commitment. The buyer, seller and the mortgage lender, can proceed with the closing of the transaction after clearing up any defects in the title that may have been revealed by the title search and examination as reflected in the commitment.
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The Owner's Policy insures a purchaser that the title to the property is free from defects or encumbrances, except any listed as exceptions in the policy. It covers losses and damages suffered if the property is found to belong to someone else, if there is no access to the land, or if there is some other defect or lien on the title. An Owner's Policy specifically lists what is covered as of the policy’s effective date. The policy also contains various standard exclusions to coverage and also specific coverage exceptions that the title company will not insure, known as “Schedule B Exclusions”. The amount of coverage in an Owner's Policy is typically the purchase price. Policy premiums are determined by a promulgated formula (prices of additional endorsements are promulgated as well) and the premiums may be paid by the seller or buyer as the parties agree. Title insurance coverage lasts as long as the insured retains an interest in the land insured and, typically, no additional premium is paid after the policy is issued.
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In addition to the coverage provided in the Owner's Policy, The Mortgagee’s Policy also insures the validity and enforceability of the lender's mortgage lien. The lender's policy protects the lender for the amount of their loan. Pricing for these policies (and any special endorsements) are also promulgated by the Texas Commissioner of Insurance. Virtually every real estate transaction consummated in the United States requires the use of title insurance by a lending institution before a transaction can be finalized. Just as lenders require property, casualty and hazard insurance coverage to protect their investment, the vast majority of first lien lenders will also require title insurance as additional security for their investment in real estate. Depending on the amount of the loan, junior mortgage lenders may choose to rely on a title search, which typically provides less legal assurances to the lender than the full title insurance policy.
The mortgage lender is as concerned as the buyer about the quality of the title because the property is to be security for the new mortgage loan. The mortgage lender requires assurance that it has a valid first mortgage lien on the property, or other mutually acceptable priority lien. This is not only common sense, but generally is a legal requirement of regulated mortgage lenders. The lender's title insurance, however, doesn't protect the new buyer of the property. Although the property being insured may be the same, the respective interests and rights there under of the buyer and the mortgage lender differ greatly
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