Understanding the mechanics of real estate title insurance

When a Tennessee couple decides to purchase a home, they will face many legal issues, many of which may seem like they have been written in a foreign language. One of the strangest such issues is ownership of the property being purchased. Most people have little or no idea how local government agencies keep track of who owns (or has owned) a given piece of land.

The record of such ownership is called a “title.” Land records in any county can be searched for many years, usually back to the date on which the federal government issued a “patent,” that is, an outright grant of title to the parcel. The couple who is purchasing the house wants to be certain that they will be acquiring a valid title and that no other party can make a claim to the land.

If the couple is borrowing money to make the purchase, the lender will also require assurance that the title being conveyed (transferred) is valid and not defective. The device for accomplishing both goals is called “title insurance.”

The basics

Most land patents in the United States were issued during the 19th century; in Tennessee, some patents may have been issued in the 18th century. In the intervening years, most parcels have been the subject of many transactions, including sales and purchases, using the land as security for the purchase price, or some other loan.

Most of these transactions were reflected in documents filed with the county recorder or similar office. The process of recording these transactions may easily have permitted errors to enter the documents, which comprise the record, or “chain of title.”

What does the title insurance company do?

Once the premium is paid, the title insurance company will issue an insurance policy that protects the interest of the party purchasing the policy. If the policy insures the owner’s interest, it is called an owner’s policy. If the policy insures the interest of a bank making a loan and accepting a mortgage on the property as security, the policy is called a “mortgagee’s policy.”

Regardless of which party is the named insured, the policy ensures that the chain of title is free from claims that are adverse to the interest of the insured. If such a defect should appear after closing, the title insurance will pay the cost of correcting the problem, including any lawyers’ fees.

Should a home buyer purchase an owner’s policy?

The premium for an owner’s title insurance policy is not steep, especially considering the other costs that the buyer must pay. Thus, many home buyers elect to forgo the purchase of an owner’s policy.

These small savings may appear to be foolish if a title defect later appears, like when the current owner wants to sell the property. In the last analysis, the best course of action may be to consult an experienced real estate attorney for advice.