Why Title Insurance?



Title Insurance Is a Critical Part of Buying and Selling Real Property

There are few things as important as title insurance when it comes to buying or selling real property.  At the same time, title insurance is often not well understood by consumers.  A title insurance policy, like any insurance policy, is an indemnity contract between the insurer and the insured.  Basically, the insurer agrees to pay any cost suffered by the insured as a result of a loss covered by the policy.

Most insurance policies cover events that take place after the policy is issued.  Title insurance looks backward only and will pay only for losses suffered as a result of events that took place before the policy was issued.  This sounds a little odd, but makes sense once you understand how title insurance works.

Title insurance is intended to protect against losses suffered as the result of having accepted defective title to real property.  Title is defective, or not, at the time title passes from one party to another.  That is why title insurance looks backward.  It insures the title as of the date it is transferred.  Defects that arise after the transfer of title are not covered by title insurance.  That is why a new title policy is issued each time the property changes hands.

Title to real property may be defective for a number of reasons.  There may be defects in the chain of title from one purchaser to the next.  Such defects never go away.  Title can also be encumbered by liens or mortgages.  Title may be burdened by easements or other agreements regarding use of the property.  Some title defects, such as those that result from fraud, incompetence, or mistake during past conveyances, are difficult or impossible to uncover.  Others, such as liens, loans, easement and other encumbrances, are usually more visible but may be difficult or impossible to remove.

Most real estate sales contracts contain a clause that deals with title insurance.  Typically, the clause will require the seller to furnish the buyer with a preliminary title report showing the condition of title to the property.  Buyers need to very carefully examine such reports and object to any conditions they consider unacceptable.  If the buyer does not object, they will be deemed to have accepted the state of the title as evidenced in the title report.  If the buyer does object, the seller will often have an opportunity to try to correct the matter.  If the seller cannot correct the matter, the buyer may be able to withdraw from the transaction.

Typical title insurance clauses found in real estate sales contracts require the seller to purchase a standard owner's policy of title  insurance for the buyer.  A owner's policy insures "record title."  That means the policy is based on the public record of title kept by the county clerk in the county in which the property is located.  It also means that the policy will not cover matters not shown on the public record, such as unrecorded easements or judgments.  If there are defects in title shown on the public record, the title insurance company will usually except the defect from coverage.  Standard policies do not cover claims based on adverse possession.

All this can make title insurance a difficult subject.  The type of title insurance needed will vary depending on the type of property and the state of its title.  Lenders will usually demand a mortgage policy of title insurance to protect their mortgage.  The mortgage policy is not the same as the owner's policy.  Typically, the seller will pay for the owner's policy and the buyer will pay for the mortgage policy as a loan expense.  If the state of the title is not certain, or the record shows potential defect, the buyer may want an extended coverage or "ALTA" policy.  Extended coverage policies cost more than standard policies.  The type of policy can be a matter for negotiation between buyer and seller after the preliminary title report has been issued.

One way to make sure title is properly insured in a real estate transaction is to work with a professional REALTOR® who is trained to help clients and customers navigate the intricacies of buying and selling real property in Oregon.  Unlike other real estate licensees, REALTORS® subscribe to a strict Code of Ethics that requires both client loyalty and honesty to all parties.  Buying and selling real estate can be a complicated, uncertain, and sometimes frightening undertaking for many people.  If that is the case for you, don't be afraid to seek the help you need and give us a call.

2001 Oregon Association of REALTORS®

Clarence & Jeanette Strobel, Principal Brokers CRS/GRI
of
Windermere American West Properties
320 S. Hwy 395
Hermiston, Oregon 97838

Fax (541) 564-0222
Office (541) 564-2020

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