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.
Title Insurance protects against 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 hidden title defects?
Defects are problems that have already occurred (or that will occur in the future) 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 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
Since lenders know about this risk, they won’t lend money on a property unless they are protected from this risk. Why? They want their mortgage be in what’s called first position. That means if the property ever sells, they are standing first in line to get repaid from the sales proceeds. They require their mortgage to be in first position for any purchase transaction. That means all prior owners’ liens must be paid off and released from the record.
Risk to homeowners
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) you and the lender.
- The lender would be protected by the title insurance co. attorneys. You pay your own attorney fees, regardless of the time and expense.
- Result A – Pay off the claimant to make them go away – Again, the title insurance company pays the lender’s share, and you pay yours, plus your legal fees.
- Result B – Lose the court case and are forced to pay off the claim or forfeit your property and all the equity you have in it.No bueno.
Frequency of claims due to title defects
It depends on the state. Some states’ title insurance companies say 10-12% of all transactions result in claims. That means you’d have a 10-12% chance that some or all of your property would disappear. No bueno.
Homeowner protection against title defect claims & lawsuits
Owner’s title insurance protects the homeowners. 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 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 and all 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 lender’s title insurance.
- Premiums are regulated by the state and are therefore virtually identical regardless of which title agent or title company you buy it from. Premiums are based on the value of the property.
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.
Higher Risk Scenarios
Six 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 case (equity) is at risk.
- 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 – when a subcontractor did not get paid, or when they did not sign a lien waiver.
- When buying a recent foreclosure. Liens get missed and are still valid.
- Short-sale. When a property sells for less than the total of liens against it. Liens get missed and are still valid.
- When any kind of dispute is property sells 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?
No guarantee. Opinion only. 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 United States about property ownership. 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.
