When buying a home or commercial real estate, few moments can match the excitement of being handed the keys to your new property on closing day. However, before you take legal ownership and make your big move, it’s important that you understand an essential part of the closing process — your title insurance policy.
Title insurance is a form of indemnity insurance that protects buyers and lenders from financial loss sustained from defects in a property’s title. The title must be “clear” to transfer ownership. A clear title, also known as a clean title, means that the property’s title is free from any liens, disputes, or issues that could jeopardize ownership. A clear title establishes who owns the property and ensures that no other party can legally claim ownership.
Unlike traditional homeowner’s insurance, title insurance protects against claims for past occurrences.
Before the closing, your title company will perform a title search (an examination of public records to determine and confirm the property’s legal ownership) and look for any possible claims or other title problems. Once the search is completed, the title commitment will be sent for the parties to review, then the insurance policy will be issued at closing.
There are two kinds of title insurance policies:
- Lender’s policy: Protects the mortgage lender for as long as they have a lien on the property (typically, until you pay off the loan).
- Owner’s policy: Protects you, as the homeowner or commercial real estate owner, for as long as you own the property.
Without title insurance, you could be faced with significant risk if a title defect is found later. Some of the potential defects covered by an owner’s title insurance policy include flawed records, incorrect ownership, and falsified documents. Carefully reviewing your title insurance documents prior to closing can help ensure you’re protected from unknown ownership or third-party usage claims.
The Parts of a Title Policy
To help you safeguard your investment, here’s an explanation of what sections are included in a title insurance policy, according to the American Land Title Association (ALTA):
-
Covered Risks
This (first) section lists what kinds of risks the policy insures against. Some of the most significant of the covered risks are:
- Errors in public records or invalid deeds
- The risk that someone else owns your property, including undisclosed heirs
- A defect or encumbrance on your title caused by fraud or forgery
- Any liens for real estate taxes or assessments that were due but unpaid
- The risk that your title is unmarketable (you’re unable to sell your property to a purchaser because of a title defect)
- Right of access to and from your land
- Boundary disputes
-
Exclusions
The next section concerns exclusions that limit the coverage of the policy and issues that are outside the control of the title company. These exclusions include matters such as:
- Governmental regulations on the land and eminent domain
- Title matters created or agreed to by the insured (new property owner)
- Title defects known to the insured but not disclosed in writing to the title company prior to the date of the policy
- Certain types of liens, such as tax liens
- Environmental hazards and mineral rights
-
Schedule A
In this section you’ll find specific information on the title and policy. Schedule A must be attached to the policy for it to be valid. Details set forth in this section include:
- Commitment date
- Name of insured
- Policy amount
- Vesting information
- Legal description of the land insured by the policy and the estate insured
-
Schedule B
The various exceptions (specific issues or encumbrances) to the title that the title company found via its title search can be found in this section. The title company lists items as exceptions to make it known to the insured that these items are not covered by the title policy, and the title company will not pay a claim or defend against a claim based on these excepted items. Common exceptions include:
- Property owner’s new mortgage(s) on the property
- Easements
- Future Taxes
- Building and Use Restrictions recorded against the property
- Any other limitations on the title, such as governmental rights or survey issues if no survey has been performed
-
Conditions
Lastly, this section outlines the relationship between the insured and the title company. The Conditions describe the rights of the title company to pay or settle the claim, and the determination, extent and limitation of liability. The first paragraph defines certain terms used in the policy, such as “Insured,” “Insured Claimant,” and “Public Records,” to eliminate any ambiguity. Also in this section are explanations of how a claim under the policy is handled, including:
- How to provide notice of a claim
- What is required to prove loss
- The requirement that the insured must cooperate with the title company in the handling of the claim
In most policies, there is also a paragraph that allows the insured or title company to demand arbitration if the amount is under $2 million.
The Differences with Commercial Title Policies
It’s important to note that while residential title primarily focuses on protecting individual homeowners and their residential properties, commercial title ensures that the land can be used for commercial purposes. Despite some overlap, there are significant differences between commercial and residential title insurance.
Commercial transactions may involve multiple parties, much larger monetary investments, far more complicated issues with title, and increased due diligence between buyers and sellers. And, unlike their residential counterparts, the commercial professionals will work on their due diligence during the transaction timeline, which may include the following- zoning requirements, environmental laws, and property condition assessments. They will request that the policy include numerous ALTA title endorsements.
Vanguard Is Your Partner in Navigating the Title Insurance Process
It’s no secret that title insurance is complex and full of language that may not easily be deciphered. At Vanguard Title Co., we “speak” title insurance and have successfully closed thousands of real estate transactions throughout the state of Michigan and Florida. Our team of knowledgeable title and closing specialists has 30+ years of experience in the areas of real estate, title insurance, mortgage, and closings, and is ready to help you, too.
Whether you’re buying a home or commercial property, we explain everything at the start of the closing process to minimize any confusion and prevent any surprises along the way. From the first contact to the final details, we keep all parties involved in each transaction informed and updated. We’re committed to making sure that your closing is a smooth process from beginning to end.