By Sharon Hassler—What is title insurance? Basically, a title insurance policy protects the investment of the new owner (and lender if there's a new loan) through measures such as covering legal costs for certain title disputes arising after transfer of title to the property. When sellers transfer ownership of a property, they can give only those rights they have through a clear title. Before a title policy is issued, title companies, attorneys and/or abstractors carefully research the ownership history of each property to uncover and resolve any problems (known as defects) such as forgery, fraud and unrecorded liens and easements.
Who needs title insurance? Buyers and lenders need title insurance so they're assured of the ownership of the property and protected from title disputes.
Do buyers need title insurance if they know or are related to the sellers? The sellers may be completely honest and yet be unaware of problems with the title. Divorces, fraud, forgery, changes in wills, unrecorded liens for forgotten bills, easements not recorded... Events may have "clouded" the title without the sellers' knowledge. Even the most trustworthy sellers cannot provide assurances that they are transferring a clear title.
When is the premium due and who pays? The premium is paid one time, at the close of escrow. Sellers traditionally pay the Owners Policy since they are the ones who need to show a clear title is being transferred to the buyer. Buyers who are taking out new loans generally pay for the Lender's Policy.
How long is the title policy effective? A title insurance policy has a perpetual term. That means it provides coverage for the new owner as long as that owner is in a position to suffer a loss from a defect in the title.
Will the homeowner ever need to use the title insurance? Probably not. However, there are no guarantees that the previous owner's long lost relative won't show up with a 20-year old claim to the property. In addition, some newer policies provide homeowners with post-policy protection. That means the new homeowners may be covered for events occurring after the property is recorded in their names. For instance, the owners may be protected if in the future, someone forges their signatures and takes out an equity loan on their property without the sellers' knowledge.