Everything You Ever Wanted To Know About Title Insurance
Although title insurance is commonly used in real estate transactions, few sellers, buyers, and lenders really understand it as well as they should.
Buyers and mortgage lenders regularly purchase title insurance. Many of them are not, however, aware of the complexities of the product that they are purchasing. The following questions and answers will identify and highlight some of the intricacies of title insurance.
1. Why is title insurance important?
In real estate transactions, buyers generally seek evidence that the title they propose to acquire is marketable. Lenders seek evidence of the priority of their mortgage. In both cases, this evidence has historically taken many forms, such as a title certificate from a government office, or an abstract of title and attorney's title opinion. In almost all real estate transactions today, title insurance is the most commonly used evidence of title, because it is faster, cheaper, and provides broader protection (insuring over such things as fraud and lack of capacity) than other forms of title evidence.
2. What is a title insurance policy and what does it do?
A title insurance policy insures the status of the state of title to a specific parcel of real property. The policy is a statement by a title insurance company that, in exchange for a premium paid, it is willing to assume the risk that title to a parcel of real estate is as it is stated to be in the policy. A title insurance policy indemnifies the insured party (the buyer or lender) against losses suffered if title to the property is not as the policy states it to be. A policy of title insurance may be purchased from a title insurance company, which typically must have been licensed by the state body having jurisdiction over insurance companies, to underwrite this form of insurance. The purchase price for the policy is called the "premium." In Florida, the "premium" for title insurance is regulated by the State.
3. What is a title insurance commitment?
A title insurance "commitment" is a document in which a title insurance company promises to issue its title insurance policy in the form and as of the date set forth in the commitment upon payment of its premium. This promise is given in response to an order from a customer and is good for ninety days, after which it expires. The transaction for which a title insurance commitment has been requested should be consummated within that period so the title company will be obligated to issue its policy.
A title insurance commitment is not considered a "policy of insurance." A title company has no obligation under a commitment except to issue a policy when the premium is paid on a timely basis. Although a few reported decisions create a concept called "abstractor's liability" when justifiable reliance exists, as a general rule, if a commitment turns out to have been incorrect because, for example, it failed to reflect a prior mortgage or other defect in title, the holder of a commitment will have no recourse against the title company unless a policy of title insurance has been issued. A policy should be purchased at or following the closing.
4. What will a title insurance commitment disclose?
A title insurance commitment contains a description of the property to be insured, the name of the proposed insured, the name of the proposed insured, and the coverage limits of the policy to be issued. It identifies the current owner of the property and the specific policy form that the company will use to insure title. A commitment also contains a list of requirements that are conditions to the issuance of a title policy and a statement of any standard and non-standard exceptions to title that exist and for which no insurance coverage will be provided.
5. What is "gap" coverage?
The title company's obligation to insure exists only as of the date the commitment was issued. Significant changes in title to the property could occur between the date the commitment is issued and the date the transaction in question actually closes. For example, during this period, the property could be sold or mortgaged or a tax, mechanic's, or construction lien could be asserted. It is, therefore, extremely critical that a title insurance commitment be updated to the exact time of the closing in order that the title policy issued will neither be obsolete nor contain any unanticipated problems for the parties involved. This is called covering the "gap."
6. What is a title search?
A title search is a description of matters affecting title to a parcel of real estate that have occurred within a stated time frame. A title search is sometimes ordered by those having an interest in the history of title to a parcel of property (such as environmental engineers), but it is of limited value because it provides no contractual guarantee of accuracy or statement or assurance concerning the condition of title.
7. Who generally pays the title insurance premium - the seller or the buyer?
Although the matter is subject to negotiation between the parties, in Florida, the seller generally pays the title insurance premium due for the buyer's owner's policy, while the buyer pays the premium applicable to any lender's policy required by his or her mortgagee.
8. Why do mortgage lenders need title insurance?
A lender's policy of title insurance provides the lender with assurance that, at the time of the loan closing, the borrower held clear title to the real property collateral used to secure the loan and that the mortgage taken by the lender has the priority required by the Lender. Title insurance for a lender is often required by applicable federal regulations. In addition, a lender's title policy must be in the lender's loan file when the originator of a mortgage sells the mortgage on the secondary market.
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