Last Updated 5/31/2023
Issue: Title insurance can help provide the home buyer and/or the mortgage lender necessary protection against losses resulting from unknown defects in the title to your property that occur prior to the closing of a real estate transaction.
Unknown defects in a title, such as any outstanding liens on the property (e.g., unpaid real estate taxes by a prior owner) or encumbrances (anything that might hinder the owner’s right of ownership; e.g., errors or omissions in deeds, undisclosed errors, fraud, forgery, mistakes in examining records), can result in additional costs in the future or even invalidate a home buyer’s right of ownership in the property, and might also invalidate the lender’s security interest in the policy. Title insurance policies will cover the insured party for any covered losses and legal fees that might arise out of such problems.
Title insurance agents/companies search public records to develop and document the chain of ownership of a property. If any liens or encumbrances are found, the title company might require that the home buyer take steps to eliminate them before issuing a title policy. Title insurance agents might also hold money in escrow and perform closing services for an additional fee.
Background: Title insurance policies are indemnity policies — typically, they protect against losses arising from events that occur prior to the date of the policy, which is the date of closing. This is unlike other types of insurance policies, such as auto or life insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. A title policy is usually paid for with a one-time premium that is handled at the closing of the real estate transaction.
Nearly all mortgage lenders require that the home buyer purchase the lender’s title insurance policy for an amount equal to their mortgage loan. A lender’s policy is issued to a mortgage lender. The policy provides the lender protection from covered losses arising from any previously unknown defects in the title that have become known only after the insured property has been financed. The lender’s insurance policy will remain in effect until the amount financed has been repaid, the property is resold or until refinancing has occurred.
The home seller or buyer may buy an owner’s policy. In many areas, sellers pay for owner title policies as part of their obligation in the transfer of title to the home buyer. The party paying for the owner’s policy can be negotiated during the purchasing process. An owner’s policy is issued to a home buyer. It provides the home buyer protection from covered losses arising from any previously unknown defects in the title that existed at the time of purchase, and became known only after ownership of the property was acquired. An owner’s policy remains in effect as long as you own or maintain an ownership interest in the insured property.
Status: The Title Insurance (C) Task Force studies issues related to title insurers and title insurance producers. In 2014 the NAIC adopted the “Title Escrow Theft and Title Insurance Fraud White paper ." In 2015 the NAIC adopted the “Title Insurance Consumer Protection Fund Guideline” and the “Survey of State Insurance Laws Regarding Title Data and Title Matters, November 2015.” In 2021, the Task Force adopted revisions to the Title Insurance Consumer Shopping Tool Template to include questions and answers about title insurance-related fraud topics, including, but not limited to, closing protection letters (CPLs) and potential enhancements to protect consumers from fraudulent activity. In 2022, the Task Force will explore what the industry will look like post-pandemic, review current rate regulation practices, and evaluate CPLs and consult with Consumer Financial Protection Bureau (CFPB) and other agencies.
Committees Related to This Topic
Market Segment Outlook: US Title Insurance
AM Best, February 23, 2023
Survey of State Insurance Laws Regarding Title Data and Title Matters
NAIC Title Insurance (C) Task Force, March 2019
How to Set Rates if You Must: An Efficiency-Based Methodology for Setting Promulgated Insurance Rates with an Application to Title Insurance
Journal of Insurance Regulation Vol. 34, No. 7, 2015
NAIC Title Insurance Shopping Tool Template
NAIC Title Insurance (C) Task Force (Adopted on 7/30/15)
Buying Your Dream Home? Protect Your Property with Title Insurance (NAIC Consumer Insight, Aug. 2020)
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Regulatory Research Specialist
Assistant Director, Data Collection and Statistical Analysis