Title insurance protects against past defects or unknown potential problems affecting the title to real estate. In the context of real estate, “title” means the legal right of ownership including the right of possession, the right to sell or devise (by will), the right to mortgage, and the right to encumber (by granting utility easements, oil and gas leases, et cetera).
There are two basic types of title insurance – a lender’s policy and an owner’s policy. Both types of policies insure who the proper owners are, and that there are no defects in title or outstanding interests or claims of others unless specified. A lender’s policy further provides to the lender that their mortgage is valid and that there are no other mortgages prior to theirs. Locally, owner’s policies are often routinely used for certain types of properties such as condominiums and time-share units.
In some cases, owner’s policies can also insure over specific defects or imperfections in the title. records. Each type of policy makes a title company responsible to pay claims and legal fees should a problem arise. Lenders require title insurance to provide assurance to their investors that the mortgage loan is secure. The loan policy is also important to lenders when they sell groups of mortgages to other lenders and investors.