"If my lender is obtaining a title insurance policy, why do I need to purchase title insurance?"

This article discusses the difference between a lender's title insurance policy and an owner's title insurance policy, and explains why an owner's policy is advisable.

There are two kinds of title insurance policies:
·     an Owner’s Policy
      a Lender’s Policy 

A Lender’s Policy is issued in the amount of the mortgage loan and provides coverage only for the lender.  Most lenders require you to provide lender’s title insurance coverage to protect their investment just as they may require fire insurance and other coverage.  An Owner’s Policy is usually issued in the full amount of the real estate purchase price and provides coverage as long as the insured or the insured’s heirs have an interest in the property. 

Before issuing a title insurance policy, the title insurance company will search the public land records for matters affecting title to the property.  The purpose of the title examination is to determine ownership of the property and to identify all liens against the property and all material objections to the title.  If problems are revealed by the title search, frequently they can be resolved so that clear title can pass to you.

However, in spite of a thorough title search, there are hidden defects that may be discovered after you have completed your real estate purchase.  These include:
·     undisclosed or missing heirs
·     a forged deed that transfers no title to real estate
·     lack of mental competence by grantors
·     mistakes in the public records
·     instruments executed using invalid powers of attorney
·     deeds or other instruments executed under fraud or duress

Title insurance provides financial protection against these and other hidden risks.  If you have purchased an Owner’s Policy, the title insurer, without expense to you, will defend you against any claims against the title to your property. The title insurer will indemnify you against financial loss up to the policy limit.

A frequent question is, “If my lender is obtaining a title insurance policy, why do I need to purchase title insurance?”

You need owner’s title insurance coverage because the lender’s policy protects only the lender and does not protect your equity in the property.  For example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien. The lender acquires title insurance protecting the lender's interest up to $80,000. But the purchaser does not purchase an Owner’s Policy and purchaser's $20,000 equity in the property is not covered.

If an issue arises affecting the ownership of the property, the title insurance company would defend and protect the interest of the lender. However, the purchaser would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title.

The title insurance company would pay the lender's loss and be entitled to take an assignment of the note and mortgage or deed of trust. The purchaser could lose the equity in the property and the balance on the note would still be due.

A purchaser of real property should purchase owner’s title insurance to protect his interest in the property. 

Disclaimer: This publication provides general information and is not intended to provide legal advice. The information presented should not be construed to be formal legal advice or the formation of a lawyer/client relationship. Persons accessing this site are encouraged to seek independent counsel for advice regarding their individual legal issues

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