Do you really need title insurance?

This morning I spent some time in a seminar on title insurance given by Linda Witt of  Attorney Steve Greenberg’s office at Icard Merrill, and she shed light on several of the questions that come up around title insurance.

At a real estate closing or settlement, the buyer (or buyer’s lender, or both) will pass large checks across the table to the seller in exchange for marketable title to the property being sold. What does marketable title mean? The non-lawyer answer is that it means the title has no mortages, liens, or other encumbrances against it — that the ownership of the property well and truly passes to the buyer with no strings attached.

Why title insurance, then? Because things come up! Forgeries and fraud — not just on this transfer but anywhere in the chain of past transfers — can affect marketable title. Lost heirs can appear — that is, people who show up after many years and say they have a claim on the property. Even lost filings — a lien that by clerical error never got recorded at the courthouse and so was not cleared prior to the sale — can pop up and cause a good deal to go bad. The stories you hear at title offices would curl your hair!

Title insurance covers all these risks for the entire life of that title, for a single up-front premium. How much is that? It is a standard amount based on the purchase price of the property, generally a bit over one-half of a percent. Will you ever make a claim against the policy? Odds are against it … but while the incidence of claims is low, the dollar amount of the risk covered can be staggering.

No lender would make a loan against a property without a valid title policy. If you were buying for cash, could you elect not to buy title insurance? Yes, you could … but you won’t save much money. Why not?

Because a portion of that title insurance premium pays a significant part of the compensation earned by the closing agent. Because of this, the closing agent’s fee for all the work of closing the transaction (and it is almost always  a LOT of work) is ridiculously low, like $300 or even less. Take that title policy out of the mix and you could expect that fee to go up significantly (hey, no one likes to work for free). In most cases, the cost of a title policy is not much more — so why not get the protection?

Who pays for title insurance, the buyer or the seller? This is always open to negotiation, but the general rule is that whichever party pays for the policy gets to select the title (closing) agent.  But either way … you get a policy to protect you against all those title risks, for as long as you or your heirs own the property.  I wouldn’t go without it.