Why do I need title insurance?

Why do I need Title Insurance?

In order to obtain title insurance, a title agent will search the county land records and other sources to determine what liens, easements and restrictions are recorded against a property.  In order to close and receive an owner’s title policy, liens such as outstanding judgments, mortgages and tax liens will be satisfied at closing.  The title company will ensure that these payoffs are transmitted to the proper party.  Once a mortgage or lien is paid off, a document called a Satisfaction will be recorded in the County Clerk’s office.  After closing, the buyer will receive a title policy that insures that all these liens are paid and that there are no other easements or restrictions recorded against the property other than those identified in the policy.  The title insurance premium is a one-time premium paid at closing. 

                There are two types of title policies: a loan policy and an owner’s policy.  A loan policy only protects the bank’s interest.  An owner’s policy insures the homeowner for the full purchase price.  If a title dispute arises and you do not purchase an owner’s policy, your bank will have coverage and you will be required to defend your title on your own.  The bank’s policy also only covers the mortgage amount, not the purchase price of the home. 

Having an owner’s title insurance policy is important for a number of reasons:

1.            An owner’s policy serves as proof that prior mortgages were in fact paid off.  It is not uncommon for a mortgage satisfaction to go missing and not get recorded against the land records.  For example, Owner A bought property for $100,000.  Owner A took out a mortgage of $ 80,000.  When Owner A sold to Owner B, the balance of the mortgage was paid off at closing.  The satisfaction got lost and never got recorded.  When Owner B sells to Owner C, Owner A’s mortgage is still open of record despite being paid off.  If Owner B has an owner’s policy, his policy insures that the mortgage was paid and provides indemnification to Owner C and his title company.  All Owner B needs to do is provide a copy of the policy (or ask his insurance agent to provide a copy).  If Owner B does not have such a policy, that indemnification is not available and Owner B may have to spend significant time and legal fees tracking down a satisfaction or worse, having to obtain a court order that the judgment is paid.  This takes time and delays closing.

2.            Similarly, a buyer’s title company will accept a previous owner’s policy for other title objections such as estate issues. 

3.            The title search that is a prerequisite to obtaining a title policy identifies various liens, judgments and other title objections that are against the property.  If you forgo a title policy simply because you are buying from a family member, you run the risk that their judgment becomes your judgment.  For example, Dad wants to sell property to Son for cash.  Son decides not to get a title insurance policy.  Son was not aware that Dad had neglected to pay income tax and the IRS had filed an income tax lien against the property.  The lien was not paid at closing.  When Son goes to sell, he will be required to pay off the IRS lien in order to close.  If, on the other hand, Son had purchased title insurance, the title company would have identified the lien during its title search, required Dad to pay the lien as a condition of closing and would have insured the lien had been paid.  If the title fails to identify the lien, it would indemnify Son should the IRS attempt to enforce the lien or when the Son sold the property. 

4.            If your title is challenged in Court due to a circumstance prior to your ownership and you have an owner’s policy, the title company will pay to defend the lawsuit and will either pay to clear the title issue or write you a check. 

While loss of title is an extremely rare occurrence, your home is one of the biggest investments you can make.  Protect that investment by buying an owner’s policy when you purchase the property. 

If you are in the process of buying or selling real estate, please contact the Law Office of Elizabeth K. Cassidy at 845-987-7223 to discuss your needs today. 

This is not intended to be legal advice or establish an attorney client relationship.