Title Insurance 101

Written by Posted On Monday, 17 December 2007 16:00

Title insurance in Texas is regulated by the Texas Title Insurance Act. It provides buyers of real property and their lenders with a contract of indemnification for loss or damage incurred as a result of defects in the title to the real property being purchased.

Hence, title insurance does not guarantee the state of title, but is a contract by the insurer to indemnify the insured to the limits of the amount of the policy if a claim is made against the title to the real property.

Title insurance provides coverage against matters existing as of the effective date of the title policy and does not cover defects in title arising for the first time after the effective date.

Title insurance companies ("title companies") issue title policies and title insurance agents ("title agents") are authorized to issue title policies for certain title companies. Title companies issue, underwrite and guarantee title policies, whereas title agents write title policies on behalf of a title company and receive a portion of the title insurance premium in return. The title company, as opposed to the title agent, is the party that pays on any successful claims made against the title policy.

Once a title company or title agent is selected, a request for title insurance (along with a legal description of the real property) will be submitted. A title examination is made to determine the condition of the title to be insured and to evaluate the risk to be undertaken in the issuance of a title policy. Subsequently, a title commitment will be issued which commits the insurer to issue a title policy in favor of a named insured in the amount of the purchase price of the real property.

Title commitments set forth exceptions to the coverage of the title policy. Examples of exceptions to coverage may include easements of record, outstanding mineral interests, or liens against the real property. It is in the insured's best interest to have as many exceptions removed from the title commitment as possible. Unless removed from the title commitment, exceptions will be set forth in the title policy, and the title company will not be responsible for any claims arising out of such exceptions. The title commitment also sets forth the conditions that must be satisfied before the title policy will be issued.

At the closing of the transaction, the title agent, on behalf of the title company, will issue a title policy (or a marked up title commitment) after all required documents have been executed and delivered and the funds to purchase the real property have been transferred from the buyer to the seller. The title policy will be effective as of the date of the closing.

The two most common types of title policies issued are the owner's policy and the mortgagee's policy. The owner's policy insures the buyer/owner of real property against loss or damage as set forth in the title policy. The mortgagee's policy insures against the same types of risks as the owner's policy, is issued in favor of the buyer's lender, and is generally issued at the request of the buyer to satisfy the buyer's lender. Texas uses standardized forms and rates for title insurance.

Although the party that pays for the title policy is typically the seller, both the seller and buyer are free to negotiate in their earnest money contract which party will be responsible for payment. The premium for title insurance is paid at closing and a settlement statement reflecting such payment will be issued by the title company.

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