What is title insurance?

Title insurance is an indemnity policy covering defects in the ownership of a property — claims, liens, encumbrances and errors in the public record — that already existed at the moment the policy was issued. It answers one question: is the interest being conveyed the interest the buyer believes it is, and if it turns out not to be, who carries the loss.

The policy is issued after a search of the public records, and the search is most of the work. A searcher assembles the recorded chain of ownership and everything recorded against the property and against the names in that chain, the items found are dealt with before settlement wherever they can be, and the policy stands behind whatever the search could not reach.

That is what makes it different from the ordinary meaning of the word insurance. Most policies are bought against something that might happen later; this one is bought against something that has already happened and has not yet been discovered. The premium is paid once, at closing, rather than periodically, and the coverage lasts for as long as the insured party holds the interest it covers.

Two different policies can be issued on one transaction and they protect different parties. A lender's policy protects the lender's lien position for as long as the loan is outstanding, and a lender advancing money secured by real property normally requires one as a condition of funding. Its amount tracks the loan rather than the property.

An owner's policy protects the buyer's own interest in the property. It is a separate policy, issued to a different insured, in an amount tied to the purchase rather than to a loan, and it does not come into existence because a lender's policy was issued. A buyer with no loan has no lender's policy at all, so on a purchase made without financing an owner's policy is the only one there is.

Who pays for which policy is a matter of local custom and of the contract, and it varies between states and between counties within a state. Nothing on this page says who pays; it is a term of the deal, negotiated like any other, and the settlement statement is where the answer for a specific transaction appears.

A title commitment — sometimes a preliminary report or a binder — is the document issued before closing that says what the insurer is prepared to insure and on what terms. It is not the policy. It is an offer to issue one, conditional on the things it lists being done, and reading it is the single most informative half-hour in a transaction.

It is normally organised in schedules. One identifies the proposed insured, the amount, the interest to be insured and the current record owner. Another lists requirements — the things that have to happen before the policy issues, such as payoffs, releases, signatures, corrective instruments or entity documentation. Another lists exceptions: matters the policy will not cover, which commonly include easements, restrictive covenants, mineral reservations and whatever an accurate survey would disclose.

The exceptions are where the useful information is. A commitment that promises a clean policy subject to a long list of exceptions is describing a property with a long list of things attached to it, and those attachments are facts about what is being bought regardless of whether anyone objects to them. Requirements can be satisfied; exceptions are generally what remains.

Ownership of land in the United States is evidenced by documents recorded in public offices, one instrument at a time, over a very long period. That system is durable and public, and it is also a system in which a deed can be forged, a signature can be unauthorised, an heir can be omitted, a name can be misspelled, a legal description can be wrong, a release can be recorded against the wrong parcel and a judgment can attach to somebody with a similar name.

A search finds most of that, and the ones it finds are dealt with directly rather than insured around: paid, released, corrected or excepted. What a search structurally cannot find is the rest — a defect that leaves no trace in the records it examines. Insurance is the mechanism for that residue, and the residue is the reason the product exists.

The coverage is usually described as having two halves. One is the money: if a covered defect produces a loss, the insurer indemnifies the insured up to the policy amount. The other is the defence: the insurer takes on the cost of defending the insured's title against a covered claim, which is frequently the larger of the two in practice.

It does not cover the condition of the building. Title insurance is about ownership, not about roofs, foundations, plumbing or appliances, and it is not a home warranty, a service contract or a substitute for an inspection. A perfectly insured title can sit under a property that needs a great deal of work, and the policy will have nothing to say about it.

It does not cover what it excepts. Everything listed in the exceptions is outside the policy by definition, which is why the exceptions are read before closing rather than after a problem appears. Survey matters are the standing example: what an accurate survey would show is a common exception, and it stops being excepted only if the steps to remove it are actually taken.

And it is not a statement about value. A policy amount is a limit of liability agreed at issue; it is not an appraisal, not a market figure and not a representation about what the property is worth. The policy answers who owns what, and it answers nothing else.