It depends on the situation.
First, let’s clear this up: Title insurance does NOT have ANYTHING to do with whether the title agent did a bad job or not – this is a ridiculously common misconception. You are protected from title agent error by their errors & omissions insurance or if they are an attorney, by their malpractice insurance.
Two types of title insurance
Lender’s – It’s mandatory and only protects the lender. You pay for this at every loan closing.
Owner’s – Protects you, the property owner.
What is title Insurance for?
It protects against financial loss due to legal claims resulting from the discovery of title defects.
What? Title defects? Yep. These are hidden errors that are 100% non-detectable even if a perfect title search & exam were performed. There are numerous types and they are found every day and month in the U.S.
What are title defects?
Title defects are hidden problems that have already occurred but have not yet been discovered. Examples include, but are not limited to:
- County recorder error – Documents recorded with misspellings, wrong addresses, or wrong names make them impossible to find in a perfect title search.
- Defective deeds; Improperly typed legal descriptions; Improperly indexed or recorded deeds, mortgages or liens.
- Ex-spouses who did not sign off on previous deeds in spousal rights states
- Undisclosed or missing heirs
- Suppressed wills
- False declaration or forgery of deeds, releases, and wills, etc.
- Disability of grantors by reason of incompetency or impairment
- Fraud, duress, or coercion in securing grantor’s or acknowledging officers’ signatures
- Deeds delivered after death
- Recorded instruments that were signed (executed) by persons acting under voided powers of attorney, voided by death or insanity of principals
- Secret or common law marriages
- Birth of children subsequent to date of parents’ will
- Falsification of records
Lenders know this risk & frequency of legal claims being made due to title defects
Lenders don’t want another party to be standing in line first when the property is sold due to a title defect, leaving the lender getting only some or none of the sales proceeds to repay their loan on that property. So, lenders won’t lend money on a property unless they are insured against this risk, and that’s why all borrowers are forced to pay for a lender’s title insurance policy at every closing. So, if the lender can’t get paid back due to a title defect issue, the title insurance company makes the lender whole. But this lender’s policy does NOT protect the property owner.
Risk to property owners – legal fees, settlement, or loss of some of all of your property
So, if as a result of some defect, someone were to step forward and claim to have an ownership interest in your home – in whole or in part – due to a deed or lien defect, they would file a legal claim (threat to sue) against both you and the lender.
- The lender would be protected by the title insurance company’s attorneys.
- You would not be. You’d have three options:
A) Hire an attorney, then pay off the claimant to make them go away
B) Hire an attorney, defend against the claim in court, then pay a settlement.
C) If you lose in court, you could be forced to pay off the claim in full, or forfeit your property and all the equity you have in it.
Frequency of legal claims due to title defects
It depends on the state. Some states’ title insurance companies say 10-12% of all transactions result in a claim. That means you’d have a 10-12% chance that some or all of your property would disappear. Although the author recommends owner’s title insurance in any purchase scenario, there are six property-purchase scenarios where these risks are HIGLY elevated, and it becomes a “no-brainer” to buy it – detailed below.
Owner’s Title Insurance protects you
Common features are:
- Completely optional to buy
- 1-time premium
- Covers you for the entire time you have an ownership interest in the property, even if you rent it, put it in trust, or into an LLC.
- Zero deductible – you have first-dollar coverage
- Covers you for 150% of the value of your property – so as it grows in value, it’s covered
- The company defends any claims for you, 100% at their time and expense, regardless of the time it takes to do so. And, if they lose, they pay off the claim in full.
- You get a discount if you buy it at the same time as the lender’s title insurance policy.
- Premiums are regulated and are relatively the same regardless of the company.
“Normal” Risk Scenarios
In “normal” situations, it depends on your risk tolerance. Depending on your state, the percentage of claims filed against homeowners varies. Claims can be for some amount of money up to and including the entire value of your home.
Six Higher-Risk Scenarios where owner’s title insurance is a no-brainer, in the author’s extremely experienced opinion. They are:
- Cash purchases OR large down payments – all your equity is at risk of loss.
- When the seller is an estate OR they are heirs of a recently deceased person. Heirs and money often lead to disputes and lawsuits.
- When buying new construction, a remodel, or when an addition has been done. Materialmen’s liens are common – subcontractor payment disputes.
- When buying a recent foreclosure. Liens get missed and remain valid.
- Short-sale. When a property sells for less than the total of liens against it. Liens get missed and remain valid.
- When any kind of dispute is known to exist regarding boundaries, shared driveways/fences/hedges, etc. A title claim may be the likely result. Ask the neighbors!
How do I get a free & clear title?
There is no guarantee, ever. An opinion is the best anyone can ever get in the U.S. Ha! Yes, due to title defects being part of the U.S. land records & recording system, the best you can ever get is only an opinion. That’s right. An attorney’s title opinion – It states, “in my opinion”, subject to many, many exceptions (including title defects and many others) “that so & so has clear title” to said property. There is zero guarantee in the U.S. about property ownership, so always buy owner’s title insurance.
Bottom line – Is owner’s title insurance a ripoff? No. All title insurance companies are in business to make a profit, and the largest are all Fortune 500 companies, but the cost of potential harm versus the affordable & regulated premiums makes owner’s title insurance a no-brainer. It depends on your risk tolerance and ability to afford the extra few bucks for it. I recommend not being pennywise and pound-foolish. The author has seen scores of defects and has cleared up many for clients and given folks bad news as well. It’s relatively cheap, and all the other facets of it are above. A no-brainer for me on ANY purchase, regardless of the situation, and that’s after retiring as a title agent, having closed over 8,000 transactions across all 120 counties of Kentucky.
