What is Title Insurance?
Title insurance is a type of insurance that provides protection to property buyers and mortgage lenders against financial loss due to defects in the title of a property. It is not an insurance that replaces home and contents – but insures you in relation to issues that may arise regarding ownership of the property.
A “title” in real estate refers to legal ownership and the right to use and occupy a property. Title insurance helps ensure that the property’s ownership is clear and that there are no hidden issues or claims that could arise and affect the buyer’s or lender’s interests.
There are two main types of title insurance:
1. Owner’s Title Insurance:
This type of insurance protects the property owner from financial loss if a title issue arises after the purchase. It covers issues like undiscovered liens, unpaid property taxes, fraud, errors in public records, and other claims that might threaten the property owner’s legal ownership or rights.
“Title insurance is a unique form of insurance. It protects your ownership interest against losses incurred as a result of undetected or unknown defects that affect your registered interest in the title to your property. With certain exceptions, these covered title defects must exist as of the policy date, but be unknown to you. Title insurance continues to protect your ownership from the day of settlement to the day you sell your property. Should you purchase a policy it will be customised to reflect the details of your particular real estate transaction.”
2. Lender’s Title Insurance:
When a buyer takes out a mortgage to purchase a property, the lender requires this type of insurance to protect their investment in case of title issues. Lender’s title insurance typically covers the outstanding loan amount and ensures that the lender’s lien position is secure.
ALA Law utilises Stewart Title for all of our purchasers as it provides the best value title protection for our clients.
An example of where Title of Insurance would be effective is provided below by Stewart Title:
“ Example 1 – Covered Risk under Section 2.1 of the Policy You purchase a three-bedroom home for $500,000 being the Policy Amount.
At the time of settlement of purchase and entry into the title insurance policy (the Policy Date) you are not aware of any Covered Risks affecting the property.
Six months after settlement, you receive an Enforcement Order from a Local Authority ordering you to demolish one of the bedrooms because it was built by a previous owner without approvals required by law. The unapproved bedroom existed prior to the Policy Date.
You make a claim under section 2.1 (r) of your Policy.
If Actual Loss is relevant, how will Stewart Title assess your “Actual Loss”? As the claim relates to a Covered Risk under Section 2.1 of the Policy your Actual Loss will be assessed as at the Policy Date.
Stewart Title will engage a licensed valuer to ascertain the difference between the value of the land purchased as a three-bedroom home ($500,000) and the value of the land as a two-bedroom home as at the Policy Date.
The valuer determines that the market value of the land as a two-bedroom home was $450,000 as at the Policy Date.
As you paid $500,000 for three-bedroom home, then your Actual Loss resulting from the order to demolish the third bedroom is $50,000.
The sum of $50,000 is the difference between:
- the value of your land unaffected by the Covered Risk as at the Policy Date – what you actually paid for the property not taking into account that the land was affected by a Covered Risk which was $500,000; and
- the value of the land affected by the Covered Risk as at the Policy Date – the market value of the land taking into account that the land was affected by the Covered Risk which was $450,000.”
It’s important to note that title insurance is a one-time premium paid at the time of property purchase and provides coverage for as long as the policyholder or their heirs own the property. While it’s not a legal requirement at ALA Law, we strongly recommend it because it offers valuable protection against unexpected title issues that could result in financial loss or legal complications in the future.
Title insurance companies play a crucial role in ensuring a smooth and secure property transaction by providing the necessary coverage and mitigating risks associated with potential title defects.