The official definition of Title Insurance is the "assurance of indemnification for loss occasioned by defects in the title to real property or to an interest therein which is insured." In English, that means Title Insurance is a contract to underwrite against financial losses incurred as the result of liens or encumbrances upon, defects in or inability to market the title to residential or commercial real property as described in the Title Policy. Because land endures over generations, many people may develop rights and claims to a particular property. The current owner's rights, which often involve family and heirs, may be obscure. There may be other parties (such as government agencies, public utilities, lenders or private contracts) who have "rights" to the property. These interests limit the "title" of any buyer. Before a title insurance company can issue the Title Policy a few steps must be taken:
First, the title company performs an extensive search of all recorded documents related to the property (i.e. recorder of Deeds, Prothonotary, Register of Wills, etc.). The records are examined by experienced title officers to determine their effect on the current status of ownership and a report is issued to you and your agents for review. This examination will discover any pending title problems that must be taken care of prior to purchasing the property, like tax liens, mortgages, judgments, or potential defects in the chain of title.
Second, after reviewing the title search results, the Title Insurance Agent will issue to the Lender and/or Purchaser, a Title Binder or Commitment to Insure. The Title Commitment serves as notice to the Lender and Purchaser that upon satisfactory removal of the liens and objections to title as set forth in the Title Commitment, the Title Insurance Company will issue the appropriate Loan and/or Owner's Policies.
You may ask yourself "if all this research is done prior to purchasing the property, why do I need Title Insurance?" The answer is, even with the extensive research, some title flaws may go undetected. The most common flaws are:
- Confusion due to similarity of names
- Invalid court proceedings
- Previously unrecognized rights of spouses
- Mistaken legal interpretations
- Defective deeds
- Undisclosed heirs
These types of problems may surface at any time in the future. We protect against these problems with the title insurance policy that is issued after our research. There are two types of policies generally issued when you purchase a property.
A lender's policy covers the lending institution for the life of the loan. An owner's policy covers the homebuyer for the total amount paid for the property.
Each policy is a contract of indemnity that agrees to assume the responsibility for defending your title against any defect covered by the policy's terms and to reimburse you for financial losses up to the policy limits.