Title Insurance

Updated September 4, 2020

What Is Title Insurance?

Title insurance is a type of insurance policy that protects property owners and their lenders against losses resulting from problems with a property title. It provides coverage for financial costs caused by pre-existing or future property ownership issues. It can also help cover costs for fixing renovations that were not done to code and lawsuits over rightful ownership

How Does Title Insurance Work?

To understand how title insurance works, you’ll first need to know property titles work.

A title is a document (or multiple documents) that proves that the holder is the rightful owner of a given property. These documents provide information such as existing liens, the property abstract (chain of title), and potential encumbrances.  

In order to purchase a property, it must have a clean title. That means no defects like unpaid taxes or zoning errors. After a licensed property title specialist has reviewed the title – and confirms that it is clean – the buyer can move forward with the transaction.

Rather than paying a recurring, monthly premium, the buyer will make a one-time payment that is held in escrow prior to the purchase or refinance of the property. Once the buyer has purchased title insurance, the property will be fully covered for as long as they own the property.

What Does Title Insurance Cover?

Title insurance provides coverage for a range of title defects. These include (but are not limited to:

  • Ownership claims by another party
  • Flawed signatures, forgery, and fraud
  • Conflicting wills
  • Erroneous surveys
  • Unresolved building code violations
  • Restrictive covenants are restrictions that reduce value or enjoyment of a property (e.g., homeowner’s association that prevents boats from being stored in the driveway, limits on the size/ type of pets).
  • Encumbrances or judgments against property, such as outstanding lawsuits and liens
  • Encroachments that violate property rights, such as a neighbour's deck or fence being built on your land
  • Easements (the right of access to property for a specific purpose, like a driveway, service road, or public utilities
  • Zoning or bylaw non-compliance
  • Back taxes or assessments
  • Pre-existing property damage that the buyer and lender were unaware of
  • Mistakes or errors in the property’s title records
  • Buyer's failure to follow through with the purchase

Types of Title Insurance

Two types of title insurance exist: Owner’s title insurance and lender’s title insurance.

Owner’s Title Insurance

Owner’s title insurance protects the buyer of the property from financial losses resulting from title disputes and defects.

Lender’s Title Insurance

Lender’s title insurance protects the mortgage lender who issues the loan for the purchase of the property. It protects them from financial loss due to disputes or defects in the title, along with situations that prevent the buyer from following through with the purchase or transferring ownership rights.

Why Is Title Insurance Important?

Title insurance protects the buyer from a wide range of title defects and disputes that could lead to significant financial costs. And these issues are not rare: According to the American Land Title Association, roughly 25% of residential real estate titles are found to have title issues.

Risks of Not Having Title Insurance

Title defects and disputes may seem like an unlikely issue, but they’re more common – and disruptive – than you might think. Imagine finally coming across your dream fixer-upper, getting approved for a mortgage, and starting to design your new home. After closing, you find out that a large portion of the home does not meet building code regulations and a significant amount of work is needed to bring it up to code. 

Without title insurance, you would be entirely on the hook for all construction costs. With title insurance, your policy could cover most – if not all – of the costs, saving you thousands of dollars.

How Much Does Title Insurance Cost?

Like most types of insurance, the cost of title insurance varies depending on a number of factors, like property location, value, size, geographical area, and other variables. The average cost of owner’s title insurance is about $1,000. The average cost of lender’s title insurance is also about $1,000.

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Who pays for title insurance?

In most cases, the buyer of the property pays for both owner’s title insurance and lender’s title insurance. However, in some states, the seller is required to pay for owner’s title insurance as a way of stating that the property title is clean (ie. free of defects and disputes).  There are also a few states where the payment for title insurance is negotiable or split between the parties.

Is an owner’s title insurance policy necessary?

No. Lender’s title insurance is usually required but owner’s title insurance is usually optional.

Do I need title insurance if I pay cash for a house?

Since you won’t be using a lender, you will not need lender’s title insurance. Owner’s title insurance is optional but still could be a good idea.

Can you get insurance on a car with a salvage title?

Yes, but it will likely be much more difficult than insuring a non-salvaged car.

What are the two forms of owner’s title insurance?

The two types of owner's title insurance are standard and extended. Extended title insurance offers extra protection from things like identity theft and specific title defects.