Title Insurance 2

Definition of "Title Insurance"

Insurance against loss arising from problems connected to the title to property. A home may go through several ownership changes and the land on which it stands through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems. Lender Versus Owner Policies: All mortgage lenders require title insurance to protect their lien against the property. A lender policy is for an amount equal to the loan and lasts until the loan is repaid. As with mortgage insurance, the borrower pays the premium, which is a single payment made upfront. To protect his or her equity in the property, the owner needs an owner's title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small. Coverage Period: With the exception noted below, title insurance only protects against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future. On a title policy, the owner's protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy. Extended Coverage: The standard title insurance policy provides no protection against false claims that arise after the property is purchased. Yet such events occur. Identity theft can result in a new mortgage the owner knows nothing about. Or a neighbor could build on the land without the owner's knowledge and, after a period without challenge, could acquire ownership rights. A new policy is available in most states that protects against such contingencies. It is usually referred to as the ALTA Homeowner's Policy. It may cost a bit more than the standard policy. Title Insurance on a Refinancing: A borrower who refinances does not need a new owner's policy, but the lender will require a new lender policy. Even if the borrower refinances with the same lender, the lender's policy terminates when the old mortgage is paid off. Furthermore, the lender is concerned about title issues that may have arisen since the purchase. However, insurers generally offer discounts on policies taken out within short periods after the preceding policy In some cases, discounts are available as far out as six years from the date of the previous policy. Cost Structure of Title Insurance: Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property, or mortgage insurance, which protect against losses from future events over which the insurers have no control. Cross-Subsidization: The cost of providing title insurance is not much different for a small policy than for a large one. The reason is that most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not related to the size of a policy. Despite this, premiums are scaled to the amount of coverage, the amount of the mortgage, or the value of the property, which suggests that smaller policies may be underpriced and larger policies overpriced. Geographic Variations in the Cost of Title Insurance: The cost of title insurance varies widely from one area to another. One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately. To complicate it further, in some states the charges for title-related services are paid to title insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies. Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors. Shopping for Title Insurance: Most borrowers leave it to one of the professionals with whom they deal real estate agent, lender, or attorney to select the title insurance carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers. Borrowers may be able to save money by shopping for title insurance themselves, although it is difficult to generalize because market conditions vary state by state, and sometimes within states. I would certainly shop in states that do not regulate title insurance rates: Alabama, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West Virginia. There is no point shopping in Texas or New Mexico because these states set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary. In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in 'rating bureau states'': Pennsylvania, New York, New Jersey, Ohio, and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are 'file and use' states all those not mentioned above which permit premiums to vary among insurers.

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