If you have purchased real estate in Pennsylvania, chances are you purchased a title insurance policy. But what is title insurance and what does it insure?
A title insurance policy insures that land acquired (or mortgaged) is free of all defects, liens, and encumbrances. While ownership itself may seem very straightforward, a buyer’s rights to enjoy the real estate purchased isn’t always clear. There are many ways in which the ownership (title) of real estate can be in jeopardy. Title insurance helps to reduce the possibility that title issues will arise by examining the status of title and proactively addressing potential issues, with the policy issued protecting against a loss if a buyer’s ownership rights are challenged.
Title insurance is substantially different than other types of insurance coverage. Most other forms of insurance cover unforeseen future events, such as an accident, by pooling the risk of unanticipated losses. Title insurance protects a property owner from events that may have occurred in the past, emphasizing risk prevention rather than risk assumption. To prevent risk, a title search is performed and evaluated to identify possible risks in the chain of title. Prior to issuance of the title insurance policy, risks are resolved to reduce or eliminate future risk, often unbeknownst to the property owner.
There are two forms of title insurance policies – owner’s policies and lender’s policies. An owner’s policy protects the owner’s interest in the property while the lender’s policy protects the lender’s security interest in the real estate. The most common owner’s policy insures ownership in the land, though other interests in land, such as leases, easements, and life estates can also be insured.
The owner’s policy is typically issued in the amount of the purchase price. The policy is effective as long as the owner retains its interest in the land. Although a title search is completed and examined in great detail, a hidden risk may still materialize after closing, causing the property owner great expense to defend its title to the property. Title insurance provides protection against the hidden risks. Examples of such hidden risks are:
- A deed completed with a forged signature, which would mean the “transfer” evidenced by the deed never occurred;
- Unknown heir[s] of a previous owner who claims ownership of the property;
- Documents signed under an expired or a fabricated power of attorney;
- Defective acknowledgments due to improper or expired notarization;
- Corporate franchise taxes and liens on corporate real estate assets; and
- Gaps in the chain of title.
In addition to identifying and resolving these potential title issues before the purchase is completed, an owner’s policy will pay valid claims and all defense costs against attacks on the title.
The buyer selects the title insurance company and typically pays the premium, though the party responsible for paying is negotiable. Title insurance is regulated by the Pennsylvania Insurance Commission which sets the rates for title insurance. Therefore, the premium for identical levels of coverage will the same regardless of the title insurance company selected.
A lender’s policy is issued to ensure the security interest held by a lender in real estate, securing the payment of a debt. The loan policy assures the lender of the validity, priority, and enforceability of its lien (mortgage). A loan policy is issued in the amount of the loan. Lenders commonly require that the borrower/owner obtain a policy benefitting the lender to insure its interest in the collateral. (A lender’s title insurance policy does not protect the owner’s interest, though the owner’s policy can be issued for the same level of coverage without any additional cost to the owner.)
With this primer, you now have a better understanding of the title insurance policy that protects one of your most important assets.