What is Title Insurance and Do I Need It?

A frequent question asked by buyers at the closing is “Why do I need to buy title insurance?”

Title insurance is quite different than most other types of insurance in terms of the type of risk that it covers. Most insurance, such as homeowners (property) insurance, protects the policy holder from risks in the future, such as fire or storm damage. Title insurance, however, provides coverage for past problems or errors in the chain of title to the property, such as missing or forged signatures, missing discharges, probate issues and a host of other problems. Buyers sometimes view title insurance as unnecessary because the events that are being insured have already occurred. The most common query is – “if there’s a problem with the title, why are we closing?”

There are actually two separate forms of title insurance – one form that protects the mortgage lender and the other that protects the new owner. In most transactions, where there is a mortgage lender, the bank will require a policy of title insurance to protect their loan (the “Loan Policy”). The buyer pays the premium as part of the closing costs for the transaction. A buyer has the option of purchasing a similar policy of protection for their own interests (the “Owner’s Policy”). The Owner’s policy requires an additional premium to be paid, but offers coverage in a greater amount and for the buyer’s direct benefit.

In answering the hypothetical buyer’s question as to why would the closing go forward if there was a problem with the title that needed to be insurance, the simple answer is that title insurance protects against unknown past problems. Numerous title claims involve problems or disputes that are discovered in the future. For a summary of the types of issues, please see the list of covered matters.

If an owner who purchased title insurance discovers a defect or dispute (usually this is discovered when a new title examination is performed in connection with a sale) the policy gives two critical protections. First, the insurance company will hire a real estate lawyer at their sole expense to determine whether the dispute is really a title defect. An uninsured owner, however, would have to pay their own attorney. Second, if the issue truly represents a defect in title, the title insurance policy will assure that the transaction goes forward.

Title insurance premiums are based on the value of the real estate at the time of the purchase. The amount of coverage automatically increases during the first five years of coverage up to 150% of the original coverage amount. For example, if the original coverage amount was $500,000.00, the coverage would increase by the end of the fifth year to $750,000.00 . The premium for title insurance is paid once, at the closing, and is then effective for the entire time the buyer owns the property without the need to renew.

Contact a Massachusetts Real Estate Lawyer

For more information on title insurance in Massachusetts, or if you are looking for a real estate lawyer in Massachusetts, please contact Rob D. Stewart. If you prefer, you can also telephone our offices in Boston seven days a week at toll free 866-414-0400.

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