TITLE INSURANCE FAQS

Title InsuranceThe purchase and sale of a house is often the single largest financial transaction in a lifetime. It is important that you be represented by the attorney of your choice before you begin the buying or selling process.

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What is a Title?
What is Title Insurance?
What are the Benefits of Title Insurance?
What are Title Issues?
IN SUMMARY

What is a Title?

A "title" is composed of three basic elements:

  1. Rights and interests that are disclosed in the public records or by physical inspection of the property, i.e., deeds, mortgages, leases, etc., parties in possession, utility easements, etc.
  2. Rights and interests that are not recorded but exist, i.e., limitations imposed by laws and statutes, etc.
  3. Rights and interests that are hidden, i.e., forgeries, secret marriages and unknown heirs.

Every title is made up of many different "rights" and "interests" that may be owned by different people. The "owners" of the property own the most valuable of the property's rights and interests, but other people may also have rights to the property, such as easements for utilities or mortgages, etc.

Each title can be compared to sticks in a bundle. The rights and interests are represented by the sticks. The "owners" own what we call a "fee simple" title, that is, they have purchased the most vital and valuable sticks including rights of possession, use, occupancy, enjoyment, inheritance, etc. Also, within the bundle are sticks that may be owned by other parties. These are called encumbrances and may consist of easements, mortgages, liens, etc.

When a person purchases a parcel of real estate, it is not only the physical property itself that he or she acquires, but the sellers rights and interests, "the seller's title," in the property. It is essential for the prospective purchaser to know before the transaction takes place, precisely what rights or interests the seller can convey. The purchaser also needs to know who else may have rights or interest in the property, and about any encumbrances against the property that may affect the use or enjoyment of the land. The title search must cover all these rights and interests.

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What is Title Insurance?

Title insurance is an exclusively American invention. Its purpose was well stated in the first advertisement for title insurance back in the late 1800s: "This company insures the purchaser's of real estate and mortgages against loss from defective titles, liens, and encumbrances. Through these facilities [the] transfer of real estate and real estate securities can be made more speedily and with greater security than hereto before." [circa 1876]

Protecting purchasers against loss is accomplished by the issuance of a title insurance policy, which states that if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy. Title insurance differs significantly from other forms of insurance.

While the functions of most other forms of insurance is risk assumption through the pooling of risks for losses arising out of unforeseen future events (such as death or accidents), the primary purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject of real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

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What are the Benefits of Title Insurance?

Title insurance issued provides a broad range of benefits to the parties involved in a real estate transaction.

To the Buyer
The purchaser of real estate needs protection against serious financial loss due to a defect in the title to the property purchased. For a single, one- time premium, which is a modest amount in relationship to the value of the property, a buyer can receive the protection of a title insurance policy – a policy that is backed by the reserves and solvency of the Company. A title insurance policy will cover both claims arising out of title problems that could have been discovered in the public records, and those so-called "non-record" defects that could not be discovered in the record, even with the most complete search.

A title insurance policy will not only protect the insured owner, but also that person's heirs for as long as they hold title to the property, and even after they sell by warranty deed. The Company will not only satisfy any valid claim made against the insured's title, but it will pay for the costs and legal expenses of defending against a title claim.

To the Seller
An owner of real property whose interest is insured by an owner's title insurance policy has the assurance that the title will be marketable when selling the property. The title insurance policy protects the Seller from financial damage if the Seller's title is rejected by a prospective purchaser.

Also, when the Seller conveys with "warranties," which is a traditional, the Seller is still protected if the Buyer sues because of a breach of those warranties.

To the Lender
The overwhelming majority of mortgage loans made in the United States are made by persons who are acting in a fiduciary capacity – by savings and loan associations, savings banks, and commercial banks on behalf of their depositors, and by life insurance companies on behalf of their policyholders. Because they are lending other people's money (other people's savings or policyholder's funds) these lenders must be concerned with the safety of their mortgage investments.

A policy of title insurance provides a mortgage lender with a high degree of safety against the loss of security as a result of a title problem. This protection remains in effect for as long as the mortgage remains unsatisfied.

To the Real Estate Attorney
Title insurance enables the real estate attorney to provide the client with substantially greater protection than would be afforded by the attorney's opinion alone. The attorney's opinion is only limited to recorded matters and the client can only recover from the attorney if the attorney is found to be negligent.

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What are Title Issues?

The job of searching the public records to identify existing rights and interests is not an easy task. The title searcher or abstracter reviews the public records to find all aspects of title, which can be seen and recognized. From the title search, the title examiner produces an opinion of title, from which the Company will issue its insurance.

In many areas, the title to a property can be traced back to a royal grant, charter, or the United States government. In many areas, titles are not traced back that far; instead, local custom or title insurance company requirements dictate a shorter search.

There are few titles, if any, that have a perfect history from their source, or root, to the present day. Each transfer of ownership is a "link" in what is referred to as the "chain of title." As each transaction or link takes place, there is a potential for a problem. Even if the entire chain of title appears to be in order, the chain is still subject to interpretation. When searching a title, what we are trying to determine are the various rights and interests that make up each link in the chain as it has passed from one owner to another.

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IN SUMMARY

A title is the evidence, of right, that a person has to the ownership and possession of land. It is possible that someone other than the owner has a legal right to the property. If that right can be established, this person can claim the property outright or make demands on the owner as to its use.

You need it because buying a new home is one of life's most gratifying experiences. Title insurance is a means of protecting yourself from financial loss in the event that problems develop regarding the rights to ownership of your property. There may be hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

A defective title can be caused by any number of problems that remain undisclosed after even the most meticulous search of public records can make a title defective. These hidden "defects" are dangerous indeed because you may not learn of them for many months or years. Yet they could force you to spend substantial sums on a legal defense, and still result in the loss of your property.

The lender requiring Title Insurance will not necessarily protect you. There are two types of Title Insurance. Your lender likely will require that you purchase a Lender's Policy. This policy only insures that the financial institution has a valid, enforceable lien on the property. Most lenders require this type of insurance, and typically require the borrower to pay for it.

An Owner's Policy on the other hand is designed to protect you from title defects that existed prior to the issue date of your policy. Title troubles, such as improper estate proceedings or pending legal action, could put your equity at serious risk. If a valid claim is filed, in addition to financial loss up to the face amount of the policy, your owner's title policy covers the full cost of any legal defense of your title.

Typically, it is less expensive than your annual auto insurance. The one-time premium is directly related to the value of your home, paid when you purchase your home. Yet it continues to provide complete coverage for as long as you or your heirs own the property.

LOCATIONS

Massachusetts Office

348 Park Street, Suite 208 East
North Reading, MA 01864
Phone: 978-682-1700

New Hampshire Office

289 Main Street, Unit C
Salem, NH 03079
Phone: 603-238-6311

E-mail: peter@yourcloser.net

Fax: 888-315-8335