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Real Estate Term:Title insurance
Title insurance is insurance against defects in title to real property.
In plain English, this means that in the event the insured owner of an interest in the property suffers an actual or threatened monetary loss, due to a title defect, lien or other matter of public record created prior to the effective date of the policy, that is not excluded or excepted from coverage under the policy, the title insurer will defend the insured against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.
Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. If liens or encumbrances are found, the insurer may take steps to fix them (for example, by obtaining a release of an old mortgage or deed of trust that has been paid off) before issuing the title policy or may specifically "except" those items from coverage. Title insurers typically pay a very low percentage of their premium revenue out in claims in a given year; industry averages are 5 to 10%.
While title insurance generally insures owners and lenders against things that have occurred in the past, in some limited circumstances, in some States, coverage is available for certain events that can occur after a title insurance policy is issued. Most notably, coverage is now available that includes the risk that a third party may place a forged mortgage or deed of trust against a property after the owner's policy has been issued. This coverage is included in the "Homeowners Policy of Title Insurance" (a specific policy form), published by the American Land Title Association (ALTA) and the California Land Title Association (CLTA). Note that this is not the same as a so-called CLTA Standard Policy, which provides much less coverage than the Homeowners Policy of Title Insurance.
Just as lenders require hazard (fire) insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate. Junior mortgage lenders (especially if they are not institutional lenders) may or may not require title insurance. Parties who rely on a title search rather than obtain title insurance take the risk that the title search was incomplete or incorrect.
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