Title insurance - two words - pretty simple? Well, most of us know, at least generally, what insurance is - it is protection against loss - but when used in real estate discussions, do we really understand what title is? Title is the word that identifies the ownership, i.e., the valid and legal possession, control, and use of real property (real estate). We also have title ownership of vehicles.

The status or condition of title for real estate is established and determined by written public record and is evidenced by a document known as a deed (remember Monopoly?). However, a deed is not the complete story of the status of ownership of real property. To have that, one must also have what is known as an abstract of title - which is a condensed written history of all transactions affecting the ownership of a given property. It will show things like mortgages, deeds of trust, wills, liens, foreclosure proceedings, tax sales, and other matters of interest and concern that may have been recorded concerning the rights of parties that have some interest in the property in the past or currently. Well, it should be becoming evident that this issue is not a simple one. What is important to the seller and buyer in a real estate transaction today? Simply that good or "clear" title (unclouded) is being transferred.

How do we deal with all of these issues and concerns? Today's practice is to purchase insurance to protect all parties' rights to possess, use, and transfer real estate. Title insurance was first introduced in the late 1800s and currently provides ownership protection on more than half of all real estate in the United States. What do we need protection from? Well, things like unpaid taxes, previous mortgages, judgments against previous owners, improper delivery of a previous deed, incompetence or lack of capacity of a grantor, a lack of signature of a spouse, mechanic's liens, easements, court actions, forgery, confusion due to similar names, or errors on other records. The list of possibilities is quite long.

Title insurance companies perform examinations or searches of title by reviewing the chain of title (history of ownership) and scrutinizing the abstract of title (a condensed written history of all transactions affecting the ownership of a given property) to first produce a title insurance commitment which lists the status of title, including any matters of public record which could lead to a claim against the property. The title insurance commitment will also provide for the offer to insure the subject property - identifying what is covered and what may not be covered.

This document should be reviewed and understood. Your real estate agent will be able to assist you with this. It is possible that a title defect will be found and the seller will have to take some action to clear the title. Then too, no matter how thorough the search, or how competent the examiner, there may be something that is not found or discovered during the title search. Any defect not revealed or "hidden" will also be covered by the title insurance as provided for in the policy.

Title insurance then, assures that your interests in the property are protected - as long as you own it. If a claim does arise against your property out of the past to threaten your ownership, the title company will protect you. It is important to note here that, unlike other types of insurance (such as auto or homeowner) which protect against future events, title insurance primarily protects against things that have already happened - however, some insurance companies are now offering protection against "post-policy" risks. In those cases, hidden defects and changes in laws that adversely affect ownership may also be covered. Any covered claim will be dealt with, disposed of, or you will be reimbursed, exactly as your title insurance policy provides for. As with almost all types of insurance, there are limitations and exclusions.

Unless the real estate is being paid for with cash, there will actually be two title insurance policies necessary. It is customary for the seller to pay for the owner's title insurance policy. After all, the seller is the party that still owns the property and is responsible for conveying a clear title. And, for the second policy, the buyer will normally bear the burden of paying for the lender's title insurance policy. The buyer's lender is the party that will require that they be covered - for the amount of the loan. Therefore, since the loan amount is often less than the value of the property, the lender's policy will cost less than the owner's policy. However, as with almost everything else in a real estate transaction, who pays for what may be negotiable. The cost of each title insurance policy is paid for with a one-time, single premium - paid at the time of closing. There are no annual payments or other continuing costs. However, understand that if very significant improvements are made to an insured property it may be advisable to increase the amount of title insurance coverage. Typically, with newer policies, there will be an inflation guard endorsement to cover normal appreciation in value.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.