Many people don’t understand how title insurance actually works. Here’s a brief overview of what title insurance is, and isn’t.
Title insurance is indemnity insurance. That means it will make the policyholder whole after the policyholder sufferes a “covered loss”.
A title policy does not guarantee that the title to the property insured is of any particular quality, and the party insured under a policy of title insurance is not entitled to compel the title insuror to remove perceived defects in the property’s title in the absence of an actual adverse claim.
Once a claim adverse to the insured party’s interest is made, the title insuror will defend its insured’s interest (at the title insuror’s expense) unless the claim is “excepted” from coverage by the terms of the title policy itself. A title insuror can also be compelled to clear a title defect that prevents a transfer of the insured interest.
It’s important to distinguish between the title agent and the title insuror. Most people use the phrase “title company” without making clear which of the two, usually separate, entities they are speaking of.
The title agent is the company with the neighborhood office that conducts closings and issues title policies. The title agent is generally authorized to issue title policies in the name of one or more title insurors.
The title insuror is the insurance company that stands behind the title policy. The title insuror handles claims, retains counsel where appropriate, and ultimately writes the check when that is necessary to resolve a claim.
Though some title insurors operate their own agencies, most title agents are independent contractors who are not tied to any one title insuror.
Finally, the biggest misconception about title insurance is that the title insuror *must* write a check to its insured for the full face amount of the title policy when a claim is made. That is not so.
Under the terms of a title policy, the title insuror usually has several options to address a claim. First, it can bring a legal action in the name of the insured to correct the defect if that is possible. Second, it can pay the holder of the infringing interest to surrender that interest. Third, it can pay its insured for loss caused by the title defect.
If a title insuror has a choice between paying the holder of an infringing interest to surrender the interest or paying its insured the loss caused by the infringing interest, it will *always* take the less expensive course, which is usually the former.
The amount that a title insuror must pay to its insured is the event of a title defect that cannot be cured is not generally the face amount of the title policy. The title insuror is only obliged to pay the LEAST of (a) the actual amount of the insured’s loss; (b) the actual value of the insured interest; or (c) the face amount of the policy. Because (a) and (b) are generally amounts that are much smaller than (c), it is a rare occasion indeed when a title company is compelled to write a check for the full face amount of its title policy.
Am I saying that one should not purchase title insurance? Absolutely not. Title insurance premiums are quite low as compared to the amount of coverage that they purchase, so I believe that almost every deed and almost every first (and sometimes even a second) mortgage should be covered by a policy of title insurance.
Understanding how title insurance works helps to prevent disappointment should a claim arise.
**CAVEAT** This analysis is based upon Pennsylvania law, where among other things, the form of the title policy is set by the Department of Insurance. The analysis may differ elsewhere. ***
I would be happy to discuss title insurance with you. Just call or email me.