What is Title Insurance and Why Do I Need It?

The Question: I am buying my first house and was told I need to get title insurance. What is title insurance and do I need it?

The Answer:  That interest may take many forms including an ownership interest or a judgment or lien against the property. While you are not required by law to purchase title insurance, lenders will not provide financing for the purchase of the property if you do not have a title search done and purchase title insurance.

How it Works: Once you have a fully executed contract of sale for the property you are buying, a title search and title insurance should be ordered from a reputable, licensed title insurance company or abstract company. While both the title insurance company and the abstract company can search the public records for irregularities in the chain of title (the history of who has owned the property in the past) and liens against the property, the title insurance policy you purchase is issued by the title insurance company.

Although most purchasers have their attorney order the title search and insurance from a provider of the attorney’s choosing, purchasers have the right to choose the title insurance company with which they wish to do business.

Once the public records are reviewed, a title report is prepared that sets forth exceptions to title that must be addressed before the title insurance policy can be issued. An exception to title may be anything from a tax lien or judgment against the property to the placement of a neighbor’s fence inside your property line to a break in the chain of title or an irregularity in a deed. Generally, judgments and liens are paid off at or before the closing and other title issues such as misplaced fences or ownership claims asserted by entities other than the sellers must be resolved to the satisfaction of the title company before it will omit the exception and issue a policy insuring a clean title.

Unlike auto or homeowners insurance policies that provide protection from the day you purchase the policy going forward, title insurance protects against losses or claims that arose prior to the date of the policy. Claims that arise after you purchase the property are not covered. For example, if a tax lien is docketed again the property five years before you buy it, and the lien was not uncovered by the title search, the title company is required to indemnify your lender for any losses the lender may suffer. If, on the other hand, a tax lien is docketed against the property based upon your failure to pay real estate taxes after you purchase the property, the title company has no obligation to defend or indemnify the lender. Title insurance

Title insurance is paid for at or before the closing and coverage continues indefinitely. There are no annual premiums to pay. If you refinance the property, coverage up to the date of your original closing remains intact but, the title company will require that additional searches be conducted to insure that no title exceptions arose since you first purchased the property.

The cost of title insurance is set by statute. However, abstract companies and title insurance companies may set their own fees for searches and other services they provide. In 2010 a new law took effect in New York that requires abstract companies and title insurance companies to collect sales tax on the fees they charge for many kinds of searches and services. Although the sales tax adds to the cost of obtaining title insurance, neither you nor your lender will want to do without the important protection provided by title insurance.

This article first appeared in the September 15, 2011 issue of the Times Beacon Record Newspapers.

Linda M. Toga of The Law Offices of Linda M. Toga, P.C. is an East Setauket, New York attorney with a general law practice focusing on estate planning, real estate, marital planning, small business services and litigation.