How Does a Title Insurance Policy Work?
There is an important distinction between title insurance and other types of insurance. Title insurance emphasizes risk prevention. It protects you from defects to the property title arising from past actions. All other types of insurance policies, such as a fire or a home insurance policy, are based on perceived future risks. A title insurer provides two services for the one-time premium that you pay at the time of your home closing.
The insurer performs a title search of your property to verify that it can be transferred to you free of any liens, taxes, or other encumbrances. This involves examining court judgments, documents, payment records, liens due to unpaid dues as well as pipelines, utility, road, and other easements across your property. According to The American Land Title Association (ALTA), defects are found in about 25 percent of all title searches. The title insurer ensures that such “clouded" titles are cleared or corrected before the closing of your home. It is estimated that about 80 percent of the cost of the premium is used for this purpose.
The other service provided by the title insurer is to protect you from losses that might arise from errors not detected during the title search. This includes claims of undisclosed heirs to a whole or a part of your property, fraud and forgery, and mechanics' liens. The title insurance company will pay any valid claims and bear the cost of attorneys’ fees payable in the future to safeguard your title to the property.