Title insurance policies are contracts to compensate for losses caused by defects in title that were unknown to the insured at the time the policy was purchased. Title insurance is intended to protect property owners against possible liens, encumbrances, and other defects that went undetected in a title search. Further, title insurance will potentially defend claims if a covered claim arises after the policy is purchased.
Further, like any other insurance policy, title insurance policies are very specific about what they do and do not cover. For example, title policies typically cover:
- Liens arising from a previous owner’s failure to pay
- Undisclosed restrictive covenants affecting the insured’s property
- Title defects arising from an improper foreclosure of the property
- Ownership claims by undisclosed or missing heirs
Here are a few examples of matters title policies will not cover:
- Defects that are created after the policy is issued
- Defects created by the insured, or which the insured should have knowledge of
- Problems that arise because of the insured’s failure to pay the mortgage or obey applicable laws or restrictive covenants that were disclosed to the insured
It is important to note that a title insurance policy does not guarantee perfect or marketable title—it is just an agreement to compensate an insured for losses incurred because of defective title. This means that an insurer has no obligation to compensate until the insured actually suffered a loss due to a title defect. Merely discovering a title defect does not trigger the insured’s right to compensation. For example, an off-record mortgage (presumably covered by the policy) does not give rise to a claim until the mortgagee attempts to foreclose or the property is conveyed, which must be satisfied by the owner to convey clear title.
Unlike other types of insurance, title insurance only covers existing risks and not future risks. That is, title insurance only protects against title defects in existence at the time the policy is issued.
Lastly, it is important to note that the loss or damage insured against is limited to the loss of value of the real estate or the limits of the policy, whichever is less. These policies do not include loss of investment opportunity or potential appreciation in value that arise by a delay associated with clearing title or other consequential damages in an action against the title insurance company.
Ivo Labar and Dan Veroff are trial attorneys at Kerr & Wagstaffe LLP specializing in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page