The purpose of title insurance is to protect the rights of the title holder. In transactions financed with a loan, there is typically one title insurance policy that protects the new owner and one that protects the lender. The rights that title insurance protects are things like these:
- The right to sell the property
- The right to borrow against the property
- The right to use the property for legal purposes
Before issuing a title insurance policy, title insurance companies conduct a thorough search of the public record history about the property. They have a few important tasks to accomplish from that search:
- Confirm who currently owns the property
- Confirm that the seller is legally able to sell
- Identify any outstanding liens
- Determine the order of any liens in terms of which will be paid first in the event of a foreclosure sale
- Identify any easements, covenants, conditions, or restrictions recorded in the public record that impact the owner’s rights
After completing the public record search, the title insurance company will issue a preliminary title report. That report will typically identify the property with a legal description and parcel map. It will also confirm the current owner. Most importantly, it will contain a list of exceptions/concerns. The exceptions are like preexisting conditions that they’re telling you about ahead of time so you can’t file a claim later. The following are the most common exceptions:
- Easements: Give usage rights to someone other than the owner. The most common of these are access easements that allow a neighbor to use a portion of the property for a driveway and utility easements that allow utility companies access to equipment, pipes, wires, etcetera. Easement areas must be kept clear, so in that sense they limit the owner’s use rights.
- Covenants, conditions, and restrictions: These generally contain rules about what can be done with or on the property. They are most common in communities that have homeowners associations. Any restrictions limit the owner’s use rights, so the title insurance company discloses them.
Concerns include anything the title company needs to verify before they insure that “clear title” is being transferred to the new owner. Concerns about whether the deeds from one owner to the next were done correctly will be addressed by filling in gaps with additional documents or deeds. Generally, they will require all liens to be paid off before issuing the policy, which typically happens as part of closing. They’ll confirm who should be paid and that the proper documents are signed to confirm the lien is released in exchange for the amount paid the lien holder.
The list of exceptions and concerns will reference specific documents in the public record, and the title insurance company can provide us copies of the actual documents on request. We’ll place that request for you when you work with us.
If you have questions about this or anything else, please schedule a call, send a text, or send an e-mail.
