Title insurance

Key Takeaways

• Title insurance is bought with a single premium at closing and covers defects that already existed, not events that happen later.
• An owner's policy protects the buyer's interest for the purchase price. A lender's policy protects only the lender and shrinks as the loan is paid down.
• Standard coverage insures against defects the recorded chain can hide, such as forged deeds, unknown heirs, and recording errors.
• Title insurance is an indemnity policy: it defends the insured and reimburses a covered loss, but it does not repair the defect.

What It Means

Title insurance is a policy that reimburses the holder for losses caused by defects in a property's ownership history. It is bought with one premium at closing and it never renews, which is the reverse of how hazard or auto coverage works. Those policies charge every year and cover what might go wrong next year. A title policy charges once and covers what already went wrong, before the buyer ever walked through the front door.

The risk it answers is that a records search can be careful and still be incomplete. A deed in the chain may have been forged. An heir nobody knew about may hold a claim. A clerk may have indexed a document under a misspelled name, or a Lien may have been recorded the day after the search was run. None of that turns up in a home inspection, none of it is the buyer's doing, and any of it can cost the buyer the property or the legal fees to keep it. Two policies are normally issued at the same closing: an Owners Title Insurance Policy and a Lenders Policy. They insure different people for different amounts, and only one of them is looking out for the buyer.

How It Works in Washington

In Washington, title insurers are regulated under the state insurance code rather than under the real estate license law. Each title insurer must file with the insurance commissioner a schedule showing the premium rates it will charge, any addition or change takes effect fifteen days after it is filed, and the rates may not be excessive, inadequate, or unfairly discriminatory (RCW 48.29.140). The practical point for a broker is that a title premium comes off a filed schedule, so a client asking to haggle over it is asking the wrong question.

Washington also draws a hard line around how title business is won. A title insurer, a title insurance agent, or an employee or representative of either may not, directly or indirectly, give any fee, kickback, or other thing of value to any person as an inducement, payment, or reward for placing, referring, or causing title insurance business to be given (RCW 48.29.210). That reaches things of value and not only cash, so an offer of free marketing help from a title representative is a compliance question before it is a favor. Underneath all of it sits the recording rule: an unrecorded conveyance is void against a later purchaser or mortgagee in good faith for value whose conveyance is recorded first (RCW 65.08.070). The recorded Chain Of Title is what the searcher examines and what the policy stands behind. Our 50 WA real estate practice exam questions post works through a question on the scope of a standard owner's policy.

Example

Priya buys a Tacoma bungalow for $525,000 with a $420,000 loan. At closing she pays a one-time owner's title premium of $1,450, and the lender's policy is issued alongside it. Fourteen months later a man appears with a recorded deed showing he inherited a half interest from a great-aunt who died in 2009. The deed that put Priya's seller in title had been signed by only one of two heirs. Priya's homeowners policy does nothing here, because nothing was damaged. Her owner's title policy does two things: it pays the attorneys who defend her title, and if the claim succeeds it reimburses her loss up to the $525,000 policy amount. The lender's policy would have covered only the $420,000 loan balance and would have paid the bank, not Priya. That gap between the two policies is the whole argument for buying an owner's policy.

Common Mistakes and Exam Traps

• Title insurance covers the past, not the future. A defect created after the policy date is not covered no matter how serious it is.
• A lender's policy does not protect the buyer. It protects the lender up to the unpaid loan balance, and the buyer is usually the one who pays for it.
• The premium is paid once. Any question describing an annual title insurance premium is describing a different kind of insurance.
• Title insurance does not cure a defect. It defends the insured and reimburses a covered loss, which is what makes it an indemnity policy.