Title Insurance – Only In America

The prevalence of title insurance is unique to the United States due to our system of recording real property transactions, liens, and encumbrances.  In most countries, the government guarantees the validity of real property transactions.  No such guarantee exists in the United States.  Instead, in very American fashion, insurance policies are issued to guarantee that the seller of a piece of real property is authorized to sell that property.

What Is Title Insurance

Having “title” to a property means being the legal owner of a piece of real property.  Having “clean title” means owning a piece of real property free and clear of any liens, encumbrances, or claims of ownership by other parties.  Title insurance assures a party, or lender, that title is “clean” and is a form of indemnity against third parties for claims against the title.  In other words, title insurance is a form of assurance that no other person is claiming a right to a specified piece of real property, and in the event any such claim is made the insurance company will defend against the claim.  Wikipedia defines title insurance as “a form of indemnity insurance predominantly found in the United States which insures against financial loss from defects in title to real property from the invalidity or unenforceability of mortgage loans.”

Why Does Title Insurance Exist?

The widespread use of title insurance is unique to the United States.  In most industrialized nations, the government maintains a land registration system and conclusively determines ownership of property.  No such system exists in the United States.  In the United States, every time a transaction takes place in which real property exchanges hands, the parties record the transfer with a local government recorder, which maintains a database of land title transactions.  Additionally, individuals can record liens, encumbrances, easements, and other transactions affecting real property with the recorder’s office.  In this system, while the government maintains records reflecting the transactions, it does not make any determinations as to who owns what.  As a result, in order to determine who owns a specific piece of real property and whether the title is clean, a party must conduct a “title search”, which involves examining the documents maintained by the recorder’s office to analyze the history of transactions.  Such a search should reveal whether there are potential conflicting claims of ownership on a piece of property, and whether there are any existing liens or easements that exist with respect to the property.  Title insurance essentially assures the parties that a title search has been conducted and the title is clean.  In other words, it is a guarantee to the insured party that the seller is authorized to sell the property at issue.

Types of Title Insurance

There are two types of title insurance: (1) owner’s policies and (2) lender’s policies.

Owner’s policies assure the purchaser of a property that the seller is authorized to sell the property free and clear of defects, liens, and/or encumbrances.  The limit of the policy is typically the purchase price of the property.

Lender’s policies are issued to lenders, and are primarily used to facilitate the sale of loans in the secondary market.  Like with the owner’s policy, it assures the lender and purchasers of the loan that the loan is secured by a piece of real property that no other party has a right or interest in.

Obtaining Title Insurance

Every real estate transaction should include the issuance of an owner’s title insurance policy.  During the escrow process, the selected title company will run a preliminary title search to reveal any liens, encumbrances, or defects in the title.  The title company will then provide notice of its intent to issue a title insurance policy, which may be subject to various “exceptions” that are revealed in the preliminary title search.  Alternatively, the title company will insist that specified defects in the title be cured prior to issuance of a title insurance policy.

Why Title Insurance Is Important

Purchasing a piece of real property is, for many people, the largest investment one will ever make.  It is important that that investment be safe and secure.  Title insurance insures that investment and eliminates the risk that of purchasing a piece of property from someone who does not have the ability to sell the property.  While that risk might be minimal, its consequences can be grave.

If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.