“Title insurance” is a term that is unfamiliar to most Californians who do not work in the housing or banking industries. Nevertheless, title insurance plays a critical role in most real estate transactions involving both residential and commercial property. Understanding the role of title insurance can help a would-be purchaser negotiate more favorable terms for a loan or the terms of the sale itself.
What does title insurance insure?
Ownership of real property relies on records kept by the recorder in every California county. If ownership of a tract of land changes, the deed transferring ownership must be recorded, thus providing public knowledge of the new owner. If a party, such as a bank, obtains a lien against a property as security for repayment of a loan, the lien must be recorded to be valid.
Other types of interests in land must be recorded to be enforceable against members of the public. These records are referred to as “the chain of title,” and the failure to record notice of a claim against the owner’s interest is usually referred to as a defect in the chain of title.
Lender’s title insurance
Every lender requires a title insurance policy that will protect it against any defect in the chain of title that may hinder any effort to compel payment of the load or to foreclose the owner’s equity of redemption. A lender’s policy is usually limited to the amount and term of the loan.
Owner’s title insurance
An owner’s title insurance policy protects the owner of the property against any defect in the chain of title that might affect the owner’s claim to own the property. An owner’s policy usually lasts until the holder of the policy disposes of its interest in the land.
What does title insurance pay for?
If a defect in the chain of title is discovered after the parties to the transaction have completed their title searches, the title insurance company will pay the costs of removing the defect in the chain of title. These costs may include attorneys’ fees, a payment to the holder of the interest that constitutes the defect in the chain of title, or any other costs associated with removing the defect.
Valuable counsel from a knowledgeable attorney
In Southern California, the premium for a lender’s policy of title insurance is usually paid by the buyer. While the purchase of a lender’s policy is mandatory, the owner is free to decide whether to purchase an owner’s policy. Anyone with questions may wish to consult an experienced business attorney for advice on whether to purchase an owner’s policy.