What is title insurance?

Why it exists

Ownership of real estate depends on a chain of recorded documents going back decades. Mistakes and fraud in that chain can surface years later: a prior owner's unpaid contractor files a lien, a long-lost heir claims a share, a deed turns out to have been forged, or a boundary was described incorrectly. Before closing, a title company searches public records and fixes the problems it finds. Title insurance covers losses from problems the search missed or could not find.

Two kinds of policies

• Lender's policy — required by almost every mortgage lender. It protects the lender's loan amount and shrinks as the loan is paid down. It does not protect the buyer.
• Owner's policy — optional in most states but strongly recommended. It protects the buyer's equity up to the purchase price, for as long as the buyer or their heirs own the property.

What it typically covers

• Forged or fraudulent deeds, releases or wills in the chain of title.
• Undisclosed or missing heirs claiming an interest.
• Errors in public records, such as misindexed documents.
• Deeds signed by minors, people without capacity, or someone falsely claiming to be single.
• Unknown liens for unpaid taxes, judgments or contractors.
• Defects in the legal description.
• Legal fees to defend the owner's title against covered claims.

What it usually does not cover

• Problems listed as exceptions in the policy, such as recorded easements the buyer was told about.
• Issues a survey would have revealed, unless survey coverage or an endorsement is added.
• Zoning and building code violations, unless covered by specific endorsements.
• Problems the buyer created or knew about and did not disclose.
• Environmental contamination and physical defects — those are matters for inspections, not title insurance.

Read Schedule B of the title commitment before closing; it lists the exceptions.

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How much it costs

Title insurance is a one-time premium paid at closing, typically around 0.5 to 1 percent of the purchase price for the owner's policy, varying widely by state. Some states, such as Texas and Florida, set or regulate rates; others let companies compete. When both policies are bought at once, the second is often discounted as a “simultaneous issue.” Who pays is set by local custom and negotiation — in many areas the seller pays for the owner's policy.

Enhanced policies and endorsements

Owners can often buy an enhanced (“homeowner's”) policy that adds coverage for things such as post-policy forgery, building permit violations by a prior owner, and certain encroachments. Endorsements add specific protections, such as for zoning or access.

Making a claim

If someone challenges your ownership or a lien appears from before your purchase, notify the title company promptly in writing and send copies of any papers you receive. The insurer will investigate and either pay to resolve the problem, defend you in court, or pay your covered loss. Disputes about denied claims can be taken to the state insurance department or to court.

Refinancing and cash purchases

A refinance requires a new lender's policy, but the existing owner's policy continues. Cash buyers are not required to buy title insurance, but the risks it covers are the same, so most still do.

Is it worth it?

Claims are relatively uncommon because title companies clear most problems before closing, but when a covered defect appears, the cost of defending title or losing part of a property can far exceed the one-time premium. A real estate attorney can review the title commitment, explain exceptions and recommend endorsements.

Title search vs. title insurance

The title search is the investigation: an examiner reviews deeds, mortgages, liens, court judgments, tax records and probate files, usually going back several decades, and the title company issues a commitment listing what it found and what must be fixed before closing. Title insurance is the promise to pay if the search missed something. A good search reduces the risk; the insurance covers what is left.