The most important consequence of the uniqueness of owning title to real estate – that you own a part of the earth’s surface – is that, like the earth itself, there is a history to ownership over the years. Lawyers call it the “chain of title.” Each link in the chain represents someone back in time who owned the title. This fact results in a variety of possible problems regarding the authentic title. The first, obviously, is whether some person back in the chain still has some claim to ownership. For instance, it might be that along the way one person in the chain never relinquished (or “conveyed”) his or her full ownership interest to anyone else. Maybe there was a distant relative who died and unknown to even them an heir inherited an interest – an interest which “ran with the land” as lawyers say. If, somehow, such an heir learns of his or her ancestor’s interest, a lawsuit can be filed against the current owner to obtain payment for the ancestor’s interest.
Or, maybe, there was a fraudulent conveyance of a property interest. That is, a person in the chain was not the person they claimed to be in signing the deed and was part of a scheme to defraud the buyer and make off with the purchase money. Then, there is also the possibility of an innocent mistake. Maybe the description of the property in a deed was erroneously copied and did not fully or accurately describe the intended property to be conveyed. Or maybe a clerk erroneously indexed in recording a lien or judgment against the owner in the local land records making it so a title examiner may never find it.
The common problem in such cases is that no matter how careful the title examiner is, or how skillful he or she is in the detective work required to examine the public record of deeds, the error may never be discovered in a title examination. Worse, the above is just a sampling of actual problems that have resulted in buyers having a defective title to the property they have bought. This risk in buying real estate can be reduced by a careful title examination, but short of a court order after a lawsuit, it can never be eliminated. Though relatively rare, these problems are real and when discovered can be enormously complex and expensive to resolve with, in the worst case, the current “owner” losing title and all funds invested in the property.
This is the point where title insurance provides the saving solution. By spreading the risk over a large number of real estate purchasers, title insurance companies can generally guarantee that the buyer’s title is protected against all the claims of any other party in the world. This is important. No prudent purchaser of real estate would go without the assurances provided by title insurance. For one thing, when the buyer sells the property a personal general warranty deed is usually required to convey the buyer’s interest. If the buyer has purchased owner’s title insurance he or she can sign such a personal guarantee knowing that the title insurance company is ultimately responsible for all the expenses and losses related to any subsequent dispute regarding title.
Title insurance, which is purchased one time, usually at closing, comes in two forms: lender’s insurance and owner’s insurance. Only the latter protects the buyer. The lender’s insurance only protects the lender and then only up to the amount of the outstanding balance on the loan. Moreover, when the loan is paid off that coverage ends. In contrast, owner’s insurance extends for life, even after the property has been sold. This is important because even after the property is sold, the seller can be brought back into a lawsuit over the title. This is usually a surprise to the seller, but the solution is to call the title company and have them defend the suit and cover the expenses and losses involved under your owner’s title insurance.