One of the frequent questions we are asked by buyers is “do I need title insurance?” In short, yes, you absolutely need to have title insurance and here is why:
Everyone knows that your homeowner’s insurance policy insures the physical structures on your property, but title insurance policies are different. Title insurance will protect you against financial loss if there are circumstances that adversely affect or restrict the title to your property. Unlike most insurance policies that offer protection for something that might happen in the future, title insurance is a policy for events that may have already occurred and some that may happen in the future that might affect your title to the real estate property. Once the title insurance is in place, there are no premiums to be paid and it cannot be cancelled by the title insurance company. It will remain in effect for so long as you, or your heirs, remain the owner of the real estate, with no additional premiums paid. There is also a potential premium savings that can be passed on to a future purchaser in the form of a “re-issue” of your policy within a period of 5 to 10 years.
Situations come up more than you might think that trigger title insurance and when they do: they are usually very costly to resolve, can affect your use and enjoyment of your property, and can cause undue stress on a homeowner.
When you have title insurance and later a title issue presents itself, the title insurance company is obligated to either (1) resolve the issue/dispute and pay for all costs and attorney fees incurred, or (2) if a court case is filed, the insurance company will appear on your behalf, and if the case is lost, or they are not able to cure the defect which has arisen, they will be responsible to you for any loss you incur because of actual damages, such as forced removal of a defect, or loss in your property interests. Without title insurance, a property owner assumes all financial risks for any undiscovered defects which occurred prior to transfer of title as well as after transfer of title.
Here are a few examples of circumstances that can cause title defects:
- Forged documents
- Clerical errors in public records:
- Errors made during the closing or in the filing of your deed can cause title issues.
- Unknown liens of prior owners:
- Example: Mr. Cambell bought his home in 2020 and purchased an owner’s title insurance policy; in 2021 he enters into a contract to sell his home. During the sale a title search is performed, and it is discovered that the previous homeowner had a judgment against him for $25,000, that was not located in 2020 because there was an error in the docketing of the judgment. The payoff on the judgment is now $40,000, but because Mr. Campbell obtained a title insurance policy when he purchased his home, the title insurance company would be responsible for the judgment and provide coverage over the defect so that the property could be sold.
- Fraud
- Easements:
- Example: Mr. Bennett bought a home on the Rappahannock River in 2019. His property is not waterfront, but he has an easement over his neighbor’s property so he can cross over his property and have direct access to the river. When his neighbor sells his property in 2020, they discover that the water access easement that was recorded at the courthouse in 2015 is defective and therefore Mr. Bennett does not have any water access. In addition to being very upsetting, this has reduced Mr. Bennett’s property value. Because Mr. Bennett obtained a title insurance policy the title insurance company must pay him $30,000 for the reduction in his property value so he can sell the home and purchase one with water access.
- Boundary/Survey disputes:
- Example: Ms. Andrews purchased her home in a subdivision in 2020. The previous owner built a detached garage on the back of the property. In 2021 the county notifies Ms. Andrews that the previous homeowner built the garage over the county’s “setback line” and the garage must be torn down. The garage may be rebuilt if it does not cross over the setback line. The county establishes setback lines that determine how far away from the property lines a structure can be built. The cost to remove the garage and rebuild it will cost $15,000. Since Ms. Andrews obtained a title insurance policy, the title insurance company will pay for all the costs involved with the tear down and rebuild.
- Missing heirs:
- When a person dies, the ownership of their property will pass to their statutory heirs or to those named in their will. However, if those heirs are missing or unknown at the time of death, there can be a cloud on the title which may affect your rights to the property.
- Undiscovered will:
- When a person dies without an apparent will or heir, the state may sell his or her assets, including the home. If you purchase such a property, your title can be seriously jeopardized if the deceased owner’s will comes to light years later.
- Deeds from mentally incompetent persons
As demonstrated above, title insurance can ensure your investment is protected and you have the resources in place should any issues arise. Just with all insurance policies, pay attention to the different coverages available by your title insurance company. Most companies have a Basic or “Limited Coverage” policy and an Enhanced or “Full-Coverage” policy. The Basic policy will cover purchasers only on defects of title that occurred prior to their real estate closing. Enhanced policies cover those defects occurring prior to you obtaining title, as well as protection for some risks that occur after settlement, such as post-policy encroachments, identity theft, access, building permit violations, annual increase in policy coverage and much more.
If you are financing the purchase of your home, the lender will always require that they obtain a lender’s title insurance policy on your home. They know the risks involved in real estate purchases and want to make sure they are protected if an issue is later discovered. However, their policy will not cover you, so it important that you obtain your own policy.
Every purchaser of a new home should strongly consider and would be highly advised, to obtain title insurance. If you have questions about title insurance or title insurance coverage you should speak to one of our real estate attorneys.
