What is title insurance?

Unlike casualty insurance (auto, fire, or health insurance, for example), which protects a property owned or lender against losses arising from unknown or undisclosed defects in the past chain of title.

Unlike casualty insurance premiums, which are paid in continual installments (hence a lapse in payment my mean a lapse or cancellation in coverage), a title insurance premium is a one-time flat fee regulated by the Division of insurance and paid at the time of closing. For this one-time premium, an owner's title insurance policy remains in effect as long as the insured or the insured's heirs retain and interest in the property or have any obligations to warrant the title to the property when they sell it.

A residential title insurance policy is like a pre-paid legal defense against any challenges to the insured's title and the title company will reimburse the insured financially for any losses as a result of hidden defects in ownership rights.

The property search

Before your real estate transaction closes, the title company performs an extensive search of all recorded documents related to the property. The history of ownership of a specific piece of property is referred to as the "chain of title."

The examination and commitment to insure

Experienced title officers then examine these records to determine their effect on the current status of ownership, and a report, also called a commitment, is issued for your review. This thorough examination generally identifies any pending title problems that must be cleared prior to your purchase of the property and issuance of the policy.

The Commitment requirements

One of the most important parts of the property search and exam is to determine if there are any unreleased liens attached to the property, or any unsatisfied judgments or tax liens against the current or previous owners. Any defect against the property is referred to as a "cloud on the title" and must be eliminated before the title insurance policy can be issued.

The Commitment exceptions

In addition to the requirements that must be satisfied prior to closing, there may be other documents recorded against a particular piece of property that are considered "reasonable burdens". These items might include restrictive covenants, easements, mineral reservations, taxes, or other items that remain as burdens on the property regardless of who owns it.

Hidden risks

If title insurance companies work to eliminate risks and prevent losses caused by defects in the title before the closing, why do you need a title insurance policy?

Because even after the most careful search, some title flaws may go undetected.

Here are some of the more common flaws to title that are not of record and therefore may not be discovered after a thorough title exam:

• forged deeds, releases, or wills;
• other types of fraud (for example, false claims of ownership, false impersonation of the true owner of the property, illegal acts of administrators or attorneys);
• undisclosed or missing heirs;
• documents executed under an invalid or expired power of attorney;
• misinterpretations of wills;
• deeds by persons of unsound mind;
• deeds by minors;
• deeds by persons supposedly single but in fact married;
• liens for unpaid estate, inheritance, income, or gifts taxes;
• mistakes in recording of legal documents.

These problems, or others like them, may have arisen at any time during the history of ownership of the property but may surface at any time in the future.

Owner's Title Policy

Once the requirements have been met and the closing takes place on the transaction, an Owner's Title Policy is issued to the new owner of the property. The standard residential policy issued in Colorado is the ALTA Owner's Policy, which provides ample coverage to the owner including protection from all hidden risks mentioned earlier.

Depending upon where the property is located and whether certain conditions exist, your Realtor may request an Owner's Extended Coverage (O. E. C.) Policy for you, which will provide the following benefits in addition to those in the standard residential Owner's Policy:

• The policy amount will automatically increase by 10% on each of the first five anniversaries of the policy date;
• Mechanic's lien protection;
• Survey protection;
• "Gap" coverage;
• Covenant and restriction protection;
• Plain language policy;
• IRS reporting compliance.

In summary, title insurance allows you to enjoy your new home without the worries of past ownership.