(September, 2017)

Under the system used in most industrialized countries, the government determines who holds title to the property. Anyone with an encumbrance (distinct financial claim) against the property must register it with the applicable government office. With few exceptions, the government’s determination is final. Governmental errors lead to monetary compensation to the person harmed by the error, but the aggrieved party usually cannot recover the property.

In most parts of the United States, land titles are recorded in a governmental office, but no governmental official determines the title owner or whether any claims against that title are valid. Using this recording system, each time a land title transaction takes place, the transfer is recorded in the jurisdiction where the land is located, usually at a recorder’s office. The transfer is indexed by the names of the grantor (seller or donor) and grantee (buyer or receiver) and photographed so it can be found and examined by anyone who wants to see it. If the grantee fails to record the transfer, the transfer to that grantee is void as to subsequent purchasers of the property who don’t actually know of its existence. Under this system, determining who owns the title requires examining the indexes in the recorder’s office according to the rules established by state legislatures and courts, scrutinizing the transfer documents to which they refer, and making the determination of how they affect the title under applicable law. Disagreements are settled by the courts.

A real estate purchase contract generally includes a clause requiring the sellers to provide the purchaser with a good or marketable title to the property at closing. If a buyer takes out a mortgage for the purchase, the lender will require evidence of a clear title in the form of a title insurance policy purchased at the buyer’s expense that guarantees the lender’s interest in the property. Title insurers in the United States use the recording system to search the recorder office’s records to determine who owns the title and to what interests it is subject.

Title insurance is paid for in a lump sum at the time of the real estate closing. The premium is based on the value of the property at the time of purchase. Coverage starts on the day the policy is issued and extends backward in time. The policy date should match the closing date of the real estate property transaction, and describe the property and interests the buyer is purchasing. The title insurance policy protects against losses that could occur if the new owner discovers after closing that someone else can claim ownership of the property. A title insurance policy is not transferable.

COVERAGE

Title insurance guarantees that the title for newly-purchased or newly-financed property is free from the problems of hidden liens and claims. It is different from other types of insurance because it protects against possible past occurrences rather than future events. When problems are found with the property title, the defects need to be fixed or adverse interests need to be eliminated before the property can be legally transferred to a new owner.

It should be noted that clearing a property title of adverse interests can be time-consuming, expensive, and require the assistance of legal counsel. Disagreements may require referral to a court for final determination, with appeals possible. In the example above, the Smiths may have paid the general contractor for the entire job, but if the general contractor has died, gone out of business or is otherwise uncooperative, the Smiths’ only options may be to take the general contractor to court or pay the subcontractor in order to remove the lien from their property.

Alternately, a title insurer may issue a title insurance policy but “except” items that cannot be cleared from the title, listing these as specifically not covered by the policy. Once the property is transferred to the new owner, if there is later a dispute and lawsuit over ownership of the property because the title search was faulty, the title insurer pays the legal fees and any settlement amount.

Related Article: Title Insurance Coverage Analysis

TYPES OF TITLE INSURANCE

There are two types of title insurance

1. A Lenders’ (or Loan) Policy

2. An Owners’ Policy

Related Article: Title Insurance Eligibility

REGULATION

Title insurance is regulated at the state, not federal level. Agents who wish to sell title insurance are required to be licensed by the state in which they do business. States differ on whether the forms and rates are required to be filed. Although not regulated at the federal level, HUD and federal mortgage insurers have a vested interest in the title insurance industry as coverage is generally written in conjunction with mortgages.

Most states regulate and establish the insurance premiums for title insurance within their jurisdiction. In many states, the price of title insurance is regulated by a state Insurance Commissioner. The cost of title insurance includes fees for searching the public records and compiling a report that is used as a basis for issuing the insurance policy.

It is best to research applicable state laws since differences are substantial, including:

• Whether title insurance rates are regulated
• When regulation exists, whether the same rates apply to all carriers
• Whether filings of rates are prior approval or file and use
• What fees are included in title insurance premiums
• Are fee amounts regulated