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Title insurance companies have been providing coverage on real estate transactions since the turn of the century. Prior to title insurance, most parties buying real property relied on an Abstract of Title and an attorney's Letter of Opinion to determine if they were securing good and marketable title to the property they were purchasing. The Abstract provided a history of the property, through documentation and recorded documents, starting with the date the government issued a patent on the property, to the date the Abstract was prepared. The buyer could then examine the Abstract themselves, or pay an attorney to review the Abstract and provide them with a Letter of Opinion as to the sufficiency of the title. Although abstract companies still exist, particularly in many small towns in the East, title insurance has become the predominant method of verifying title sufficiency, particularly in the West. Unlike Abstracts of Title and Attorney Letters of Opinion, title insurance provides the buyer and lender with a title policy which will defend the title, as set forth in the terms of the policy, should a latent title problem surface at a later date.

Title insurance differs from casualty insurance, in that it insures what has occurred in the past, not what could happen in the future. Inasmuch, title companies are careful in their title review process, to minimize risks and prevent losses caused by defects in title.

Title insurance companies are regulated by state banking and insurance departments, which carefully monitor the company's escrow practices, financial adequacy and sufficiency, as well as its general insurance practices. Title insurance companies set aside a percentage of their insurance premiums for loss reserves, and establish a fund to cover future losses. These loss reserves are generally based on their historical claims experience.

Title insurance companies, which are often referred to as underwriters, issue their title insurance policies through their direct operations, or approved independent agents. In order to issue a policy, a thorough search and examination of the property to be insured is performed, a commitment for title insurance issued, and the final closing documents are carefully reviewed for their sufficiency and insurability prior to recording. To handle and accomplish this task, title companies rely on their direct operation or their agent, who maintains a title plant which is a duplication of the county recorders office. The records, however, are inputted geographically rather than by grantor and grantee, which enables the records to be searched more quickly and accurately.

Although title insurance companies issue various types of policies, the two basic policies used for the sale of property, are an owners policy and lenders combination policy. There are also several different types of owners and lenders policies which provide different levels of coverage.

Title Examination and Commitment

Upon receipt of a title order, the title company initiates a search of their title plant to create what is called a chain of title on the property to be insured. The chain of title is a list of every recorded document which affects the title to the property, as well as other unrecorded documents or other matters such as judgments, bankruptcy and real property taxes. This chain of title extends from the date of the order back to either the last insurance policy the company issued on the subject property, or to a government patent which conveyed the property to the first individual owner.

A highly trained title examiner or officer, then reviews the legal description as well as every document in the chain of title to determine its validity, sufficiency and current effect on the subject property.

Upon completing the examination, the title examiner summarizes all of the matters which currently effect the title status of the subject property, and a title commitment for insurance is prepared and delivered to the closing agent or escrow department. The commitment sets forth:

Title vesting or ownership
Full legal description

Schedule "B" Items: matters that affect the property, and will be an exception to the insurance coverage, such as easements, right of ways, subdivision covenants and restrictions.

Requirements: matters that affect the property, and will need to be addressed prior to closing, such as judgments, liens, mortgages, or other adverse title matters such as defects in title, as well as other specific requirements which will need to be satisfied in order to issue a policy (s) in keeping with the terms of the property transaction.

Title Policies

Upon satisfying all of the requirements of the commitment, and when the transaction is ready to close, the closing agent or escrow department forwards the closing documents to the title company's recording desk, where a highly trained recording officer thoroughly reviews all of the transaction documents for sufficiency, performs a final search of the subject property, and delivers the documents to the county recorders office for proper recording.

After recording the documents, the recording officer delivers the file to the policy department, which prepares and issues the title policy or policies. The type of policy issued depends on the transaction, the customers request, and the property to be insured.

The policy types most commonly issued are as follows:

Standard Owners Policy: This policy insures the owner's marketable interest in the property, subject to the exclusions under Schedule "B" of the policy. The policy protects against:

someone else owning an interest in your title
a document was not properly signed or recorded
forgery, fraud and duress
right of access to insured property
a lien on the title, which was not set forth in Schedule "B"
the title to the property is unmarketable

Residential Plain Language Policy: This policy provides the same coverage as the Standard Owners Policy, subject to the exclusions under Schedule "B" of the policy, including:

mechanic's lien protection
forced removal of a structure because it extends onto other land or easements, or violates a restriction in Schedule "B" or an existing zoning law
unrecorded homeowners association lien
unrecorded easements
rights of third parties under an unrecorded lease

Homeowners Policy: This policy provides the same coverage as the Standard Owners Policy and Residential Plain Language Policy, subject to the exclusions under Schedule "B" of the policy, including the following coverage:

subdivision map act coverage
restrictive covenant violations
post policy forgery
post policy encroachment
post policy structural damage from mineral extraction
post policy living trust coverage
enhanced access vehicular and pedestrian
map not consistent with legal description
building permit violations
post policy automatically increases in value up to 150%

Combination Extended Loan Policy: This policy is issued to a lender who is providing a loan to the purchaser, and is issued in combination with the Owners Policies. The policy provides the lender with the same general coverage as the Plain Language Policy, subject to the exclusions under Schedule "B" of the policy, including the following coverage:

converts to an owners policy in the event of a foreclosure
insures the lender against any defect in their lien
the invalidity or unenforceability of the lien of the insured mortgage
priority of any lien or encumbrance over the lien of the insured mortgage
priority of any mechanics lien over the lien of the insured mortgage
invalidity or unenforceability of any assignment of the insured mortgage

In addition to the above policies, the following are a few other policies issued:

Extended Owners Policy
Leasehold Policy
Standard Loan Policy
Litigation Guaranty
Trustee Sale Guaranty
Second Lender Policy
Homeowners Policy
Premium Coverage Policy

Title Insurance Rates

Title Insurance Rates are established by the respective title insurance companies, and are filed with the state insurance department. These rates are to reflect the premiums necessary for the title company to make a profit and insure future financial stability.

The purpose of filed rates, is to enable the insurance department to protect the policy holders, by property monitoring the financial condition of the title companies, to insure they will remain in business to honor commitments to their outstanding policy holders.

Once these rates have been filed, the insurance company can not deviate from these rates unless they have changed the rates and resubmitted them to the insurance department for approval. The insurance department routinely audits the title companies to ensure they follow their filed rates, and fines are assessed if there are violations.

Title companies provide rate cards to their customers which typically set forth the following standard rates:

Escrow Service Fee

Standard Owners Policy (which is also the rate for plain language policy)

Homeowners Policy (additional 10% of Standard Owners Policy)

Combination Extended Loan Policy (additional charge for issuing loan policy in conjunction with an owners policy).

Extended Loan Policy (policy charge when a sale of property is not involved -- typically a refinance transaction)

Standard Loan Policy (used primarily for second/home equity loans and to insure owner carry-backs.

Additional Title Reports

Condition of Title Report

This report is based upon a complete search of the title, as though it were a commitment to insure, however, it is not made on a Title Insurance Commitment form, but on a company report form with a limited liability disclaimer. The report will set forth the following:

Title vesting or ownership, legal description of property found of record, Schedule "B" items and current tax information.

Extended Limited Title Report

This report is designed to be used for informational purposes only. It is limited in a number of ways. First, it covers a period of twenty-five (25) years only. Second, it shows only unreleased Mortgages, Deeds of Trusts, and Agreements (or contracts) for Sale. Third, it shows the "Apparent Record Owners". Since a complete search of the title is not made, a determination of the actual or insurable vestee, therefore the last owner of record is reflected on the report. Fourth, a company form is used which contains a limited liability disclaimer. There is also a tax and general index search of the apparent owner.

Escrow Overview and Process

An escrow is the depositing of funds, documents, etc. by parties to a transaction, with an impartial third party or escrow agent who acts as a fiduciary, to ensure the completion of the terms and conditions of parties instructions to the said escrow agent.

The purpose of an escrow is to basically establish a custodian of the funds and documents, handle payment for all demands, and perform the clerical details for the settlement of the accounts between the parties, which are set forth in the escrow instructions, are met prior to closing the transaction.

The selling agent or buyers agent customarily designates the title company who will hold the earnest monies and act as the escrow agent, when the purchase contract is prepared. Upon receipt of the signed contract, the selling agent delivers a copy of the contract to the title company along with the earnest money check. The escrow officer opens the escrow and provides the selling agent with a receipt. The escrow officer then order the commitment for title insurance, which is often referred to as the preliminary title report and will prepared the deed as well as other appropriate documents, to include the escrow agents terms and conditions. These documents are delivered to the appropriate agent upon receipt of the commitment. These documents are delivered to the appropriate agent upon receipt of the commitment, unless the agent requests immediate deliver or the documents are to be mailed directly to to the principals. All demand letters for payoffs and assumption statements, homeowner association statements, as well as an other requests are made at this time. The escrow officer works with the appropriate agents to insure that any other terms and conditions, satisfy escrow and contract requirements, as well as make amendments to the escrow as requested by the parties to the transaction. Upon receipt of the loan package or assumption statement, as well as all other required statements, and the closing date/time as been established, the escrow officer will prepare a HUD-1 settlement statement which sets forth all of the settlement charges, payoffs, proration of property taxes, and funds due from the buyers as well as funds payable to the seller. The principals will then meet with the escrow officer, at separate times, to review and execute all of the documents, paperwork, and deposit any additional funds due. The escrow officer will then deliver the deed and other instruments to be recorded to the company's recording officer, who reviews the documents, performs a final title search, and delivers the instruments to the county recorder for proper recording. At that time all funds for payoffs, commissions, and seller proceeds are disbursed.

Title Vesting

Sole and Separate: Ownership by one person without restraint or obligations to any others. Upon death of the sole owner, their interest passes to their heirs. In the case of a married couple, separate property is defined as property owned before marriage, and that acquired afterward by gift, bequest, devise or descent. When a single person acquires property, the marital status of the person should be stated on the deed to alleviate any questions regarding marital status and community property.

Community Property: All property acquired by the husband and wife, or separately, during their marriage is considered community property, unless it is acquired by operation of law as separate property. If a spouse chooses to secure title to property in their name only, the other spouse would be required to sign a disclaimer deed or quit claim deed to the property. In the event of death of one of the spouses, their interest passes to their heirs.

Community Property with Right of Survivorship: Property acquired by the husband and wife, as community property, however with right of survivorship which automatically vests to the surviving spouse upon death. The right of survivorship estate must be accepted on the vesting instrument by the husband and wife at the time of conveyance. There is no requirement for probate or estate administration and community property may afford an improved tax basis dependent on the estate value.

Joint Tenancy with Right of Survivorship: Joint Tenancy is a form of ownership of a single estate by two or more persons which automatically vests to the survivor(s) upon death. The joint tenancy estate must be accepted on the vesting instrument by all parties to the joint tenancy at the time of the conveyance.

Tenancy in Common: This is a form of co-ownership of property by two or more persons in undivided interests. A tenant in common must own an undivided interest in the entire property but must also be entitled to share possession of the entire property. The interest need not be equal to that of the other co-tenants. Upon the death of a tenant in common, the deceased tenants interest passes to his heirs who then become tenants in common with the other tenants. The interest of each tenant is referenced in the deed, and if not, it is assumed they all have equal interests. If a married couple chooses to take title as tenants in common, they are required to accept same on the conveying deed.

Disclaimer: This information is not legal advice. For specific title questions, please contact a title agency or a real estate lawyer.

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