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Most kinds of insurance are self-explanatory. Fire insurance protects against losses from fire. Collision insurance guards against the cost of a dented, damaged car. But what does it mean to insure your title to real estate?
Real estate has always been considered a valuable possession. It is so basic a form of wealth that many special laws have been enacted to protect ownership of land and the buildings which stand on the land. You should realize whenever you buy property that the owner who is selling it to you has extremely strong rights, as do his family and heirs. Also, there may be others - in addition to the owner - who have "rights" in the property you are going to buy. These may be governmental bodies, or contractors who performed work on the property, or other individuals who have perfectly proper unpaid claims against the property.
Anyone who has such a claim is, in a sense, a part-owner. The property may be sold - to you - without the party who has a claim knowing about the sale. And you may know nothing about such a claim at the time you buy. It doesn't matter. Such claims may remain attached to the real estate you have purchase.
Will you get a clear title? It is of the greatest importance that you do. But this means that you must be informed about any of these claims against the property so that you can make certain they are cleared up before you buy. And it means that you must be protected against any undiscovered claims that may arise in the future to threaten your title and the possession of your property. Title insurance provides this two-fold protection.
How do you learn what claims there are against the property? By a search of the public records. This is the first step a title insurance company takes in order to insure your title. Title insurance companies maintain "plants"; that is, giant databases of title records, in many cases dating back over a hundred years. Each day, recorded documents affecting real property and property owners are posted to these title plants. In this way, title insurance companies keep track of every entry on public record which might affect every parcel of land.
One of the first tasks your escrow officer will perform is to order a title search from the title insurance company. Some of the things a title search uncovers are any unpaid taxes or mortgages, judgments against previous owners, easements, and many other court actions or recorded documents which affect title to real estate. The title insurance company will perform the search and report their findings in the preliminary title report. The escrow officer, seller, and real estate agent can then work together in resolving any title claims showing in the preliminary report.
But what if there is a defect in the title which doesn't show up in the public records? This can happen. Title insurance companies call them "hidden risks" - the undiscovered claims which may arise long after you have purchased your home. While the goal of every title insurance company is to conduct such a thorough search and evaluation of public records that no claim will ever arise, protection against loss from claims on real estate which cannot be discovered by examination of the public records is the second part of the twofold protection that tile insurance provides.
These hidden risks might be forgery, confusion due to similar names, or an error in the records. If a claim is made against your title as the insured, your title insurance company will protect you by defending your title, in court, if necessary; and your title insurance company will bear the cost of settling the claim, if it proves valid, in order to perfect your title and keep you in possession of your property.