Know The Law: Title Insurance Protects Against Defects

Published: Union Leader
March 25, 2013

Q: I am buying the piece of commercial property and building in which my business in housed. Why am I required to pay for title insurance when I have already paid for a title search? What is the difference?

A. A title search provides reasonable proof of ownership of the property, lists restrictions or allowances that pertain to the use of the land, and itemizes any liens that exist on the property which need to be paid off at closing. Most times these assessments (or opinions) are correct, but, in truth, they are only as good as the provider’s malpractice insurance (if any).

Title insurance, on the other hand, protects against title defects without regard to whether a mistake was made. Forgery? ID theft? A defective discharge of a paid-off mortgage? A defective prior deed? The title insurance company is responsible for any losses faced by the insured as a result of title defects existing as of the date of the policy. That may involve paying for the loss, but more likely it will involve the title insurance company taking responsibility for fixing the problem. That may often be more useful to the insured, as it often means that the new lender or new buyer can proceed without unacceptable risk.

The most common types of title insurance are loan policies and owner’s policies. Loan policies insure the title of the mortgage; they typically cover only the amount of the mortgage and they terminate when the mortgage is paid off. For this reason loan policies are cheaper than owner’s policies. Owner’s policies usually cover the amount purchased (typically, the purchase price of the property) and last forever (since warranty claims may be raised even after a property is sold). In either case, the premium is paid only once, upon issuance of the policy.

Having agreed to pay for owner’s title insurance coverage, the next most important step is for the buyer to make sure the policy is properly drafted so that it provides as much protection as possible. Title insurance covers only the state of title as described in the policy as issued, not as title should have been. If the buyer’s lawyer is providing the policy, that is the lawyer’s responsibility. If, as is more common, the buyer’s lender’s lawyer or closing company is providing the policy, the buyer should insist that the draft policy is provided to the buyer’s own lawyer in advance of closing for review.