Defending Your Title - What Title Insurance Will Do for You - and What It Won't

After an hour in the lawyer's conference room, you've signed your name in half a dozen places and written checks for the down payment and fees. Standing up and stretching, you shake hands with the lawyer, the banker and the sellers. Despite all your worries, the closing has gone smoothly and you're free to gather up your papers, thank everyone and head down the hall. Stepping outside, it hits you that you now officially own that wonderful home.

You can't help peeking again at the paper with "Warranty Deed" written in bold letters at the top. Everything looks fine: the lengthy legal description, the sellers' signatures, the statement in lofty language that you are the owner in fee simple, to have and to hold said premises forever. The document is authoritative, traditional and reassuring. So why did your lender insist on title insurance?

Because residential property often has a long and convoluted history of previous owners and transactions. You can't tell by looking at the property and the current deed whether property titles are good, as if it were a grapefruit in the supermarket. For all you know, the people you bought the house from might have slipped out and gotten a second mortgage on the property two days before closing, or neglected to pay a $5,000 special assessment for the new sewer. Perhaps the swimming pool is located right on the electric company's easement for underground lines. Maybe the prior owner decided not to tell you that her ex-husband has a lien, that is a claim on the property for repayment of debt, on the house for half the proceeds of sale.

Title insurance is like a stockade fence around your property, protecting it from pirates who might creep out of the past. Chances are you'll never file a claim, but you'll be mighty glad to have title insurance if you do.

To a great extent, securing property title insurance is an exercise in preventive law. Just as health insurance companies refuse to insure people with a history of medical problems, title insurance companies refuse to insure properties with a history of legal uncertainties. Accordingly, the title examiner combs the records with an expert eye and identifies any potential problems, such as an unpaid tax assessment or a neighbor's easement for right-of-way according to property right of way laws. The examiner then issues a preliminary report called a commitment, which lists these defects and informs you of any problems that the seller must correct prior to closing. If the company isn't willing to cover a particular matter and the seller can't or won't correct it, you have a choice whether to live with the problem or bow out of the deal. If a title insurer refuses to write the policy at all, you can bet that the seller can’t give you good title.

But even a stout stockade fence can't protect you from bolts out of the blue. Title insurance policies clearly state that they don't cover matters that arise after the effective date of the policy. So if a court files a judgment against you two months after closing, secured by a lien on your house, that's not the title company's problem. Nor is the city's decision to condemn your property to build a new fire station. And because title companies refuse to insure risks they discover in their search, the insurance policy covers only surprises: hidden problems caused before the effective date of the policy but only coming to light later.

That's why it's important to know not only what your title insurance will cover, but also what it won't: what scenarios might arise in the future that would challenge your ownership of the property title deed. This chapter offers an introduction to titles, title insurance and various encumbrances that could endanger your ability to enjoy your home.

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