Title insurance is different from traditional insurance. Traditional insurance (e.g., health insurance, car insurance, and homeowner’s insurance) protects against claims for future events, whereas title insurance protects against claims for past events.
After buying your home, if you purchased title insurance at your closing, it will protect you from financial loss resulting from certain past title defects that are covered by your title insurance policy. Title insurance is a one-time fee paid at closing and coverage lasts as long as the buyer owns the home. The coverage amount is usually equal to the purchase price and it is relatively cheap in relation to the amount of protection it provides. Title insurance is regulated by the state and therefore it is the same price regardless of the attorney or title company that closes your transaction.
There are two types of title insurance policies:
- Lender’s policy – Lenders usually require a lender’s policy of title insurance that protects the lender until the loan is paid off or refinanced. The lender’s policy does not provide coverage to the homeowner, instead it ensures that the lender has a valid and enforceable lien on the property.
- Owner’s policy – The owner’s policy insures a buyer’s ownership rights to the property and protects the buyer from title defects that existed prior to the issue date of the policy. An owner’s policy is an optional purchase, but it is almost always recommended.
As an example of the cost of title insurance and the protection it provides, lets say you purchase a home for $400,000. Title insurance in Florida would cost $2,075. The title insurance you purchase for $2,075 would protect you up to $400,000 from past title defects for the entire time you own the property. If it turns out that the seller’s identity was stolen and the property was sold to you by a fraudulent seller, then the true seller may sue you to get the property back. If you purchased $400,000 of title insurance, then the title insurance company would help defend you and cover you up to $400,000.
To provide title insurance, a title insurance company will search the public record to find title issues and provide a commitment to insure title. Items reviewed in the public record include, but are not limited to, liens, judgments, mortgages, easements, divorce decrees, tax records, and deeds. An agent of the title insurance company, usually an attorney or title company, will review the title commitment and remedy title issues.
It’s possible that searching the public record will not find all problems with a property’s title. For instance, our above example of the fraudulent seller, filing errors, unknown heirs, fraud, unrecorded easements, and forgeries might be difficult or impossible to find in the public record. A title insurance policy would insure against many title issues that cannot be found in the public record.