Title Insurance in US Real Estate Transactions

Last updated: March 25, 2019

In a real estate transaction, the seller transfers his or her title to the property to the buyer. Title gives the party the legal ownership of the property. However, if the title to the property is affected by defects, such as liens or encumbrances, it could jeopardize ownership status and prevent transfer of title to the property.

While some defects can be detected through title searches prior to the real estate transaction, some are hidden in such a way that even a very thorough title search may not reveal them upon first glance. Some examples include, but are in no way limited to:

1. A document signed by a minor;
2. Forged signatures;
3. A married person signed who represented himself or herself as single;
4. A deed signed by someone who claimed to own the property but in fact did not;
5. A deed signed by someone legally incompetent or incapacitated;
6. A deed signed by someone whose power of attorney had expired;
7. The emergence of a missing heir; and
8. Outright falsification of records.

The following link from First American Title Insurance lists more than 70 ways in which an owner may be surprised by title defects: https://www.firstam.com/ownership/70-ways-to-lose-your-property/.

To prevent situations where a new home owner would lose his or her investment due to title defects, US real estate transactions are contingent on the issuance of a title insurance policy. Unlike many other forms of insurance, title insurance protects against these hidden defects as opposed to future, hypothetical risks, and provide upfront peace of mind for prospective owners of US real estate.

More specifically, title insurance assures a purchaser that the title to the property is vested in the purchaser and that it is free from defects, liens, and encumbrances except for these excluded from the policy. Title insurance policies provide two types of coverage for owners. First, if a party contests an owner’s title in a legal action, the insurer will defend the owner’s title at no additional cost to the owner. Second, if there is a title defect which cannot be eliminated, title insurance provides an indemnity to protect the owner from financial loss due to the defect.

The title insurer will protect the title insurance policy’s owner up to the value of the purchase price of the property on title, such protection being in effect as long as the owner or his or her heir(s) owns an interest in the property.

To obtain his or her title insurance policy, a title agent must be selected by either the buyer or seller. The title agent is not the actual insurer, it is an intermediary which acts on the insurer’s behalf and works with the parties to comply with the conditions for obtaining title insurance. The title agent plays a key role in each US real estate transaction, as further explained in our article below.