For most types of property, mere physical possession can be assurance of ownership. For example, items of personal property such as jewelry, art, and clothing are owned merely by physically possessing them. Such is not the case for real estate.
Over a number of years, the title to real estate can pass from seller to buyer to new buyer dozens of times, and that the change in title is not something that is readily observable. Title insurance is a unique form of insurance which is designed to assure that you have valid title to property which you are about to purchase. It provides coverage for future claims or future losses due to title defects which are created by some past event (that is, events prior to the acquisition of the property.)
It is very important that you receive clear title to the property when you purchase real estate. In order to do so, you must first be informed of any existing rights or claims that may, in the future, threaten your title to and possession of the property. Title insurance provides you with this twofold protection.
In order to determine the status of title to the property, the Title Insurance Company conducts a search of the public records for those documents associated with your property. It then examines those recorded documents in order to determine if there are any rights or claims that may have an impact upon the title to your property. The title search may reveal the existence of recorded defects, liens or encumbrances such as unpaid taxes, unsatisfied mortgages, judgments and tax liens against the current or past owners, easements, restrictions and court actions. These recorded defects, liens and encumbrances are reported to you prior to your purchase of the property. Once reported, these matters can be accepted, resolved or extinguished prior to the closing of the transaction. Alternatively, the disclosure of those title flaws may convince you not to purchase the property. In addition, you are protected against any loss or damage resulting from recorded defects, liens or encumbrances upon the title that are unreported to you and which are within the scope of coverage of the particular policy issued by the Title Insurance Company. In other words, if the Title Insurance Company overlooked these defects, it is “on the hook” for the resulting financial loss caused by these defects in title.
The title to the property that you have purchased can also be seriously threatened or lost completely by hazards which are considered “hidden risks.” “Hidden Risks” are those matters, rights or claims that are not shown by the public records and, therefore, are not discoverable by a search and examination of those public records. Matters such as forgery of prior deeds, incompetency of the persons who signed prior deeds, fraudulent impersonation, and unknown errors in the records are examples of “hidden risks” which could provide a basis for a claim after you have purchased the property. In order to protect you against these hidden risks, your Title Insurance Company provides insurance coverage for such claims. This is the second benefit you receive from title insurance.
It is very unwise to purchase real estate without also purchasing title insurance.