What is Title Insurance?
Title insurance protects you and your lender if someone challenges your property title because of any alleged title defects, which were most likely unknown to you at the time you purchased the property but may come to light at a future date. The insurance provides for the cost of legal fees to defend you in the case of a title claim and for payment of losses which could result from the title claim.
In addition to providing coverage, prior to issuing a policy, title insurance companies examine all titles to the real property to be covered under the policy and for a one-time fee notify owners, as well as banks and financial companies who may hold a mortgage on the property, of all defects in the title and possible future losses.
Examples of common title defects:
Lost, forged, or incorrectly filed deeds. Deeds are the documents that show who owns the property, and if not filed correctly, can lead to unclear ownership rights. This can include titles filed in the wrong name or titles never filed at all.
Fraud. This can take many forms such as falsified documents making it appear as if the mortgage is paid off.
Mechanic’s liens. Unpaid contractors, homeowner association dues or property taxes can result in liens on the property.
Encroachments. Physical structures, such as a neighbor’s fence, that intrudes on the legal property boundary can create title issues at closing.
Am I Required to Have Title Insurance?
There is no law requiring you to purchase any title insurance on your home, but you may want to consider this coverage to protect your investment in your home. When you purchase a home and receive the paper title – the “deed” - to the property, you become the official owner of the property. In addition to purchasing what you can see, you may inadvertently be purchasing any unaddressed claims on the property that are attached to the title of the property. Prior to completing the purchase, you and your lender will want to make sure that no one has asserted rights to your property, usually referred to as claims, liens or encumbrances. Title insurance is usually bought as part of the closing process arranged to transfer ownership of the property to protect you and the lender from any problems or defects with the title to the property.
Owner’s and lender’s are the two primary types of title policies.
An owner’s policy protects you for the purchase price of your home plus legal costs if a title or ownership issue arises. It is usually issued for the amount you paid for your home and will cover you as long as you own an interest in the property. An owner’s policy is not required but is a good idea to protect your own financial interest in the property.
A lender’s policy protects the lender if a title or ownership problem comes up after the property is purchased. Unlike an owner’s policy, the dollar amount that would be paid if there was a problem with the title decreases as you pay off the loan and ends when you pay off your mortgage. A lender’s policy is usually required to get a mortgage loan.
How Does a Title Insurance Policy Work?
All insurance policies are legal contracts between you and an insurance company. You pay a premium to the company in exchange for the insurance company’s promise to pay for your covered losses. There is an expectation of good faith, i.e., that you and the insurance company will be fair and honest in your dealings with one another. Title insurance companies are not required to file their policies or rates with the Massachusetts Division of Insurance. Therefore their policies are neither reviewed nor approved by the Division. You should read your policy carefully.
Title insurance companies operate in a competitive environment and most likely offer different rates or services for the title insurance that may be bought as part of a property transaction. The policies offered may differ and it is possible that some companies offer special rates in certain circumstances, such as when a property is resold in less than five years. In most cases, however, your mortgage lender will arrange which title insurance company will write a policy to cover the mortgage as part of the mortgage transaction. You or your representative may be able to choose among different title insurers to compare costs and services.
Why Doesn't My Homeowners Insurance Policy Cover Me in Case of a Claim?
Home insurance and other real estate insurance policies cover you in the event of physical damage to your property or for claims filed against the property you own for damages to others caused by your or your family’s alleged negligence after the policy is in place. These other policies do not cover claims against the title of your home or real estate based on liens or other claims that are from before you received title to the property. The risk that there may be such past liens or claims that affect your ownership of the property is only covered under title insurance.
Do Title Insurance Policies Include Policy Exclusions or Other Limitations?
Yes, and as with more conventional insurance policies, it is important to understand the exclusions part of a policy to be aware of those risks that are not covered under the policy. Insurance is intended to protect you from risks, but most policies include sections that describe what types of risks or coverages are specifically excluded under the policy. A title insurance company policy may only cover you from the risk of certain claims on your title but exclude others. You should carefully examine a policy’s exclusions to understand the limitations of coverage of your property and to determine whether you need additional or other coverage to protect you from certain risks.
Title insurance policies are intended to cover a policyholder as long as he or she owns the covered real estate, but there may be conditions applied to the coverage. Companies can cancel or nonrenewal coverage, but only according to the conditions that are spelled out within the policy. You should read your policy carefully to determine the conditions for cancellation and nonrenewal.
What Should I Do If Anyone Makes a Claim Against My Real Property?
Most insurance policies generally require you give immediate notice of the possible claim to your insurance company. You may also want to consider consulting with an attorney.
Keep a hard copy of your title policy and closing protection letter in a safe place. You will need the policy documents to submit a claim.