Insurance 101: Title insurance horror stories

August 29, 2:22 PMInsurance Industry ExaminerDanny Workman

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Title insurance protects buyers who risk losing their money due to problems with the property title of a real estate purchase. A typical title insurance policy covers the amount of the real estate sales price, requires a one-time fee rather than ongoing premiums, and stays in effect until the buyer subsequently sells the property.

Risks range from invalid and fraudulent real estate sales to hidden legal encumbrances tied to an existing property title. In addition, sellers can have missing heirs, former spouses or other parties claiming that the property actually belongs to them.

For example, one devious neighbor knew that a Chicago family went to Florida every winter for 6 months. Impersonating the vacationing owner, the neighbor forged the necessary real estate documents and sold the house to unsuspecting buyers. Those buyers were shocked when the real owners returned from Florida, losing everything: the house they thought they had bought as well as the cash paid for their mortgage loan, legal expenses and title closing costs. If the buyers had title insurance, they would have been able to recoup their monetary losses from the insuring title company.

In another example, the seller established a $100,000 equity line of credit against a property that is under contract for sale. The unscrupulous seller then closes the sale of that property 10 days later, which is too soon for the equity line encumbrance to show up in a normal property title search. A year later, the new buyer went to re-finance his mortgage and discovered the $100,000 lien against his property with the original seller long gone without paying. Citing the property title used to establish the $100,000 equity line, the lending financial institution started foreclosure proceedings against the existing owner. With title insurance, the property owner could simply ask the title insurance representative to resolve the problem.

Real estate buyers typically purchase title insurance from the title company that also handles the legal transfer of property title from the seller for a closing fee. The title company performs a title search, carefully scrutinizing all records pertinent to the title to ensure that the property really belongs to the sellers and that the sellers can legally sell the property.
 

Because title insurance can be complex, consumers are encouraged to consult a reputable title company that focuses on providing excellent client services. This includes prompt issuing of title insurance policy documentation written in plain language so that the average reader can understand exactly what is covered and what is excluded.