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Real Estate Title Insurance

Buying a home is a pricey proposition. Putting the recommended 20% down toward the purchase price, in conjunction with other costs such as home inspections and homeowner’s insurance, can be costly. In my estimation, one of the more misunderstood expenses in a real estate transaction is title insurance.

Title insurance is not a typical type of insurance like life insurance or run of the mill property and casualty insurance. Pretty much all insurance operates on the principle of dispersing risk among all policyholders. Title insurance is similar to an extent, but its primary purpose is to eliminate risk rather than take on risk and spreading it amongst policy holders. This goal is purportedly accomplished by the title insurance company conducting a thorough search of county records for any and all documents affecting the property in question, particularly defects of title (e.g., liens). If a defect with the title is found, then remedial action will need to be taken before title insurance is issued. On the other hand, most other types of insurance are based upon the risk of loss. For example, most companies that issue life insurance will want some sort of physical examination or medical records of the personĀ  to determine the likelihood that a death benefit will have to paid off. Complex actuarial figuring is used in this calculus.

Without a doubt, one of the most important reasons for doing a title search and obtaining title insurance is so that you qualify as a bona fide purchaser. A bona fide purchaser is an important concept in the law, and especially property law. It essentially means that a purchaser bought property for fair consideration, and, after doing some due diligence, has no notice of any defects in title. Title insurance will generally count as this due diligence. This is important because should it later be discovered that there was a defect in the property the bona fide purchaser will be given favored status in resolving disputes as to ownership and possession of the property.

To give an example, say I buy a piece of residential real estate. I employ a title insurance company and they do a check of the title, find nothing wrong, and ultimately issue the title insurance. A year later it is revealed that there was a mechanics’ lien that was “attached” to the property, and the owner thereof is now trying to take action. In the following dispute, I, as a bona fide purchaser who did my due diligence and in good faith had no notice of this lien, will be given preferential treatment by the law. (Depending upon the facts, it may also be the case that the title insurance company is liable for negligently failing to discover said defect)

Thus, while title insurance may seem to be an unnecessary expense in a real estate transaction, it is very necessary and can really come in handy should a dispute about an undiscovered defect later materialize.

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