So I find myself coordinating real estate transactions and ushering my clients through the process only to find that they have placed much trust in my hands and, at times, they dont fully understand all the ingredients necessary to purchase or sell a property. Although I try to educate my clients as much as posible, I suppose I can always do better. So in the effort of promoting knowledge and understanding, here is some information to help you understand Title Insurance.
What Is Title Insurance?
Title insurance is used by homebuyers and lenders for protection against back taxes, undisclosed liens, legal judgments, forgeries, fraud and a host of other potential legal/financial problems that can arise when purchasing or refinancing property. Title companies perform upon an exhaustive search of the public record to identify and correct liens and encumbrances on property. Most of the title insurance premium goes towards identifying and eliminating these potential problems before the close of escrow. Consumers pay only once for title insurance – there are no monthly premiums – for coverage that lasts as long as they own the property.
Both buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies. Title companies routinely issue two types of policies: An “owner’s” policy that insures the homebuyer for as long they own their home; and a “lender’s” policy that insures the priority of the lender’s security interest over the claims that others may have in the property.
Title Insurance Protects Against Title Defects
Title insurance offers protection against various legal and financial defects (as set out in the policy) that may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess someone’s property. Another person could claim to hold an easement giving them a right of access across a person’s land. Yet another person may claim that they have a lien against an owner’s property securing the repayment of a debt. That property may be an empty lot or it may hold a 50-story office tower. Title companies work with all types of real property.
A title insurance policy contains provisions for the payment of the legal fees in defense of a claim which is covered under the policy. It also contains provisions for indemnification against losses that result from a covered claim.
According to data from the American Land Title Association, more than one-third of all residential real estate transactions have issues with the title – issues that are resolved by title companies before the closing of escrow. This emphasis on risk elimination and loss prevention results in fewer claims paid by title insurers compared to other lines of insurance. However, loss prevention and clearing title issues is a labor-intensive process and constitutes the vast majority of a title company’s operating budget.
Eliminating Risk & Solving Problems
Title insurers work in advance of issuing a policy to identify and cure potential legal and financial problems that may exist. This is fundamentally different than property & casualty insurers that assume risks. Property & casualty insurance companies realize that a certain number of losses will occur each year in a given category (auto, fire, etc.). These insurers collect premiums monthly or annually from the policy holders to establish reserve funds in order to pay out claims. Title insurance, on the other hand, emphasizes loss prevention on the front end by resolving potential problems that arise from past events.
Unlike other lines of insurance, the majority of the title insurance premium dollar goes towards identifying and eliminating potential problems for consumers before they occur – rather than paying claims after the fact. Erin Toll, the former Deputy Commissioner of Insurance for Colorado, summarized this best by stating: “…loss ratios for title insurance should be at or near zero…The real cost of title insurance is the title search, not claims payment…The core value of title insurance is ensuring clear title.” (Testimony of Erin Toll, former Deputy Commissioner of Insurance, Colorado, Hearing before the Subcommittee on Housing and Community Opportunity of the House Committee on Financial Services, April 26, 2006)
This “risk elimination” process requires enormous fixed costs to build and maintain title plants, gather and index property records and other information reaching back hundreds of years, acquire sophisticated technology systems and, most importantly, retain the skilled personnel who make sure that consumers don’t face financial or legal problems when buying property. During the 20-year period form 1985 to 2004, the expense ratio (i.e. the costs of all operating expenses) for the title industry averaged 92 percent, while the expense ratio for property & casualty companies averaged less than 30 percent. Conversely, during the same time period, loss ratios (i.e. claims paid) in the title industry averaged less than 7%, while property & casualty companies had loss ratios of about 80% (“Clouds on the Horizon After Title Industry’s Bright Year,” AM Best, October 2005)
Because title companies are risk eliminators, the probability of a claim is low. In spite of every effort to eliminate title problems, however, the title industry nationwide still paid over $782 million in claims during 2006. (ALTA 2006 Title Insurance Industry Statistical Analysis)
History of Title Insurance
Insurance of land titles did not originate in California, although it attained its greatest purchase as an industry in this state. The story of title insurance in California begins with the State’s early attempts to fashion a title registration system.
California first met legislature met in San Jose in 1850, a few months before statehood, and there adopted the recording system for land titles. Under the Mexican regime, California had only the crudest land title registration. (There were, after all, only some 700 valid private land titles in the State, together with a smattering of mission and pueblo lands.) The recording system gave the soon-to-be State of California the benefits of an American device that had proven to be useful in searching land titles and making land transfers simpler.
However simple such a system might have seemed to that first legislature of a new American possession (California, before it became a state, never attained the status of an official “territory”), it was not simple enough. The world had rushed into California with the Gold Rush of 1849. The population of San Francisco grew more than a hundredfold in that year. The average person uneducated in the niceties of common-law conveyancing, perpetuities, and the like, could not make efficient use of the recorder’s office. Thus grew up whole industries—conveyancers, abstractors, attorneys and experts who would furnish “certificates of title” and in due course, companies that insured land titles.
It is, if not enlightening, at least entertaining to get some sense of those early days in California in terms of land titles. In 1852, the San Francisco City Directory carried this advertisement for Theodore Payne & C.: “Real Estate Business in all its branches, for the conducting of which they esteem themselves peculiarly qualified by having given it their especial attention for over two years past, and made themselves familiar with all questions affecting titles, etc., etc.” The San Francisco City Directory for 1856 lists four “Searchers of recorders and conveyancers.” They were Joseph Clement, C.V. Gillespie, Gunnison & Parker, and G.W. Waugh. Gunnison & Parker, who identified themselves as “attorneys and counselors at law” asserted, “We have prepared books containing a chain of title to every lot of land in the City and County of San Francisco, with maps of each subdivision and owners. We will give Abstracts of Title at the Shortest Notice.” Waugh claimed to be a “Searcher of Records and Examiner of Titles,” asserting that he had “compiled more information and is better equipped than any man in the City in reference to the Validity of Titles in the City and County of San Francisco.”
With the explosion in volume of public land records, in real-estate transfers and hence of the business of conveyancing, the conveyancer or title lawyer often delegated the job of researching and assembling information regarding title to others. These persons became skilled as “abstractors” and in time established their own offices, and submitted the result of their searching to attorneys for written opinions before advising customers. The “abstract of title” thus came into use. The abstract was simply a written history of the recorded transactions affecting a particular parcel of land. The abstract did not originate in California, however. It had been used in the first part of the 19th century in other states.
The abstract of title is almost never used in California today, but at least until a few years ago it was still in some use in other parts of the United States, especially in the Midwest. In California, the abstract in time gave way to the “certificate of title,” which proved a shortcut for persons buying and selling land. The abstract of title was often as ponderous as a San Francisco or Los Angeles directory of the time. An abstract comprising the whole of Rancho San Jose in Pomona Valley, Los Angeles County, required 37 large volumes, and yet the only part that was of importance to the parties to the transaction was the attorneys opinion attached. In the fullness of time, the attorney’s opinion was all that the purchaser was interested in seeing, and the abstractors retained the voluminous fruits of their labor in their own offices.
Information Provided By – www.clta.org