You're getting ready to purchase a piece of real estate or improve property you currently own, and your banker, realtor or builder brings up "Title Insurance". What is title insurance and why do you need it?

Because the purchase of property is usually the largest single investment made it is important to be certain that the person selling the property has the ownership rights you think you're buying and that the property is not encumbered. Title insurance offers information on the status of the title to the land - and protection against claims that may affect the title after it's purchase or improvement.

It works like this: Prior to the close of the real estate transaction public records are searched to find all related official documents. The documents are then examined for their effect and for the basis of the title insurance policy. The examination reveals the current status of ownership and encumbrances (a claim, lien, charge, or liability attached to and binding the real property). Based on a careful evaluation of all records it shows the current record owner and current limitations on that owner's property rights, such as outstanding mortgages and utility easements. A buyer or lender knows that some of these limitations should be removed (for example, by paying off and releasing a prior mortgage) or they will continue to affect the property after closing.

If the status of the title is cleared before you purchase property why do you need title insurance? Because even after the most careful research, some title flaws may go undetected. These problems may surface at any time in the future. Some title problems may show up months or years after the original purchase of the property. The following are examples of matters that can cause loss of title or an expensive lawsuit: Forged deeds, releases, will or other legal documents; failure of spouses to join in conveying the property; undisclosed or missing heirs; deeds from minors, aliens or personal of unsound mind; liens for unpaid taxes including estate, inheritance, income or gift taxes; mistakes in recording legal documents; liens from contractors or supplies for improvements; deeds from defunct corporations and un-probated wills.

Title insurance is an insurance policy or contract issued by a title company. In addition, the title insurance company agrees to defend the owner in court if there is an attack on your title. It will cover attorney and court expenses or pay a loss caused by the defect in title up to the face amount of the policy subject to the terms listed in the policy. Title insurance is different from other types of insurance in that it protects the insured from loss that may occur from matters or defects from the past. Title insurance does not protect against a defect that may originate at a later date. Other types of insurance such as home, auto, life or health insurances cover losses that may occur in the future.

Lender's rightfully want to protect their investment. The loan policy protects the lender against loss due to unknown title defects. It also protect the lender's interest from certain matters which may exist but not be knowable at the time of sale. This policy only protects the lender's interest. It does not protect the buyer or owner adding improvements. To protect the owner's interest a separate owners policy must be purchased.

Title insurance is an issue that should be addressed in contract negotiations and included in the contract of sale or improvement.