Real Estate Title Insurance Explained

Exploring the Varied Types and Goals of Real Estate Title Insurance and Related Documents

Real estate transactions can be complex and the legal landscape surrounding them is often intricate. Even for simple and straight-forward transactions, all parties involved want to be certain that the seller is giving good and marketable title to the buyer. This means that it is crucial to ensure legal title to the property is free of any defects or claims. Real estate title insurance serves as a safety net in these transactions, protecting the interests of both the buyer and the lender under the terms of the applicable title insurance policy.

What are the different types of real estate title insurance policies?

• Owner’s Title Insurance: Owner’s title insurance is designed to protect the buyer’s investment in a property, whether the property is residential or commercial. The primary goal of an owner’s policy is to provide financial protection against any title defects that might arise during the buyer’s ownership of the property.
• Lender’s Title Insurance: Lender’s title insurance, also known as a loan policy, aims to protect the interests of a mortgage lender. The primary goal of a lender’s policy is to ensure that the lender’s financial investment in the property is secure by confirming that the title is clear and marketable. Lender’s title insurance does not protect the buyer’s equity in a property, but is a commonly a requirement in most mortgage transactions.
• Leasehold Title Insurance: Leasehold title insurance is rarely underwritten, as it is specific to properties where the buyer does not acquire full ownership but instead holds a leasehold interest. This type of insurance is most common in commercial real estate leasing transactions, where a business or individual leases a property for an extended period. The primary goal of leasehold title insurance is to protect the lessee’s interest in the property.

What does a title insurance policy do?

In an ideal scenario, the title insurance policy holder will notify the title insurance company when they get notice of an adverse claim or issue that impacts record title ownership to the property, and the title company would cover the legal costs associated with defending the ownership of the property. In the event the owner is divested of ownership through an adverse claim or title dispute, the title insurance policy should compensate the divested owners of their loss of value.

What is a chain of title in real estate?

The “chain of title” in real estate refers to the historical ownership record of a property, detailing the sequence of transfers, sales, claims, liens, mortgages, and other conveyances from the original owner to the current owner. This document chronicles the transition of ownership rights and interests over time, establishing a clear and unbroken history of the property’s ownership.

An abstract of title, often called an abstract, is the full written record of a parcel’s chain of title.

Legal Implications of a Defective Chain of Title

A chain of title which has defects, encumbrances, or other issues can have significant legal consequences in real estate transactions or for the continuing owner. Here are some key legal matters associated with a defective chain of title:

• Title Defects: A defect in the chain of title could result from clerical errors, mistakes in recorded documents, or fraudulent conveyances. If a defect is discovered, it may cast doubt on the property’s ownership history and its marketability. This can lead to disputes and legal challenges, affecting the buyer’s ability to obtain clear title. Most title defects must be addressed before the property can be sold again.
• Encumbrances: Encumbrances, such as mortgages, liens, or easements, can affect the chain of title. If these encumbrances are not properly documented or addressed, they may impede the transfer of clear title. Encumbrances can create legal conflicts and may require resolution before a property can be sold or refinanced.
• Clouded Title: When a chain of title has unresolved issues, it is said to have a “clouded title.” This term refers to uncertainties or disputes that cast doubt on the property’s ownership. A clouded title can lead to legal disputes, delays in transactions, and potential financial losses for buyers or lenders.
• Lack of Marketable Title: A chain of title with unresolved defects may result in a lack of marketable title. A marketable title is one that is free from reasonable doubt or legal challenges. If a title is deemed unmarketable, the property may become less desirable, affecting its value and the ability to secure financing or sell it.

Real Estate Title Insurance Documents

There are three extremely common title insurance documents: a title report, a commitment for title insurance (also known as a “title commitment”), and the actual title insurance policy.

• Title Report: A title report, often considered the foundation of the title insurance process, is a comprehensive document that provides detailed information about the history and condition of a property’s title. A title report typically has the following sections: legal description, physical/mailing address, current owner names, description of the document that gave ownership to the current owners (known as a “vesting instrument” or “vesting deed”), a list of liens and encumbrances (such as judgment liens or mortgages), easements, and other notes.
• Commitment for Title Insurance (Title Commitment): A commitment for title insurance, also known as a title commitment, is a document issued by a title insurance company to a buyer or lender once they have initiated the title insurance process. This typically starts when the property owner signs a contract to sell the property. This document outlines the title company’s commitment to issuing a title insurance policy upon closing the real estate transaction under certain terms, with requirements to be completed before a policy will be issued and a list of exceptions from coverage. A title commitment typically has the following sections: property details, covered parties, policy amount, terms and conditions, requirements before the policy will be issued, and exceptions from coverage.
• Title Insurance Policy: This is often an extension or restatement of the title commitment document, and provides information about what to do when a potential claim arises that may be covered under the terms of the policy.

Get Real Estate Title Counsel You Can Trust

Real estate title insurance – on paper – plays a vital role in safeguarding the interests of property buyers, lenders, and owners. However, coverage under these policies is frequently denied when claims are made. Whether you’re purchasing a home, investing in commercial real estate, acquiring a high-stakes leasehold interest, or have a disputed title issue, having experienced counsel makes all the difference. Contact Avenue Legal Group any time to discuss title insurance matters.