What is title insurance and why should I bother? This is a question I often hear when guiding a client through the initial stages of a real estate transaction. In a simple transaction – family to family, small purchase price, etc. – it may seem like title insurance isn’t necessary. No matter how small the transaction may appear, however, purchasing real estate comes with hidden risks – risks which, if not insured against, can threaten your right to the property and undermine the entire transaction.

Unlike when buying a car or an expensive TV, there are certain things that can affect your ability to obtain “good title” to real estate that are not easily discoverable upon an inspection of the property. These problems, such as mistakes in the public record, previously undisclosed heirs claiming to own the property, forged deeds, and inadequate legal descriptions, arise in about 36% of all real estate transactions and can cloud the title to the property and place your ownership status in jeopardy.[1] This is where title insurance comes in. It operates to protect buyers from defects in title that they could not know about by protecting “the property against the past, as well as the future.”[2]

A recent conversation with a friend about the mechanics of buying real estate in a foreign country drove home to me how fortunate we are to have title insurance in the States, and how important it is that we take advantage of this protection. My friend was explaining how tricky it is to purchase real estate in Indonesia if you are not an Indonesian citizen. You can go through all the motions and fill out all the paperwork, and then arrive at the property only to find out it has been sold to someone else. Even worse, the person who sold you the property may not even have had the right to sell the property in the first place.

Imagine if this were to happen in South Bend. What do you do now? You just spent your savings on a property you might not actually own. Do you lose the house? Who will pay your legal fees in a court battle over the property? If you do lose the house, can you recover the purchase price? Presumably you have a mortgage. Do you still have to make payments? In Indonesia, you might be out of luck. But in Indiana and Michigan, if you have title insurance, you have options.

Put simply, title insurance protects the owner or lender against loss or damage from title defects.[3] Under an owner’s policy, the insurer will typically reimburse the policyholder for losses they suffer up to the total purchase price of the real estate and will pay for any legal fees involved in defending the policy holder’s claims to title.[4] Ultimately, title insurance adds a much needed level of protection to the unpredictable business of buying and selling real estate and should be an essential item on the checklist of every real estate transaction.

For more information on title insurance and potential causes of title defects, see: Chicago Title Insurance Company, “21 Reasons for Title Insurance,” http://www.ctic.com/21Reasons.aspx; and the American Land Title Association’s “Title Insurance Overview,” available at http://www.alta.org/about/index.cfm#4.

[1] Meridian Title Corporation, “What is Title Insurance,” http://meridiantitle.com/pages-for-industry-resources-links/what-is-title-insurance.aspx.
[2] Chicago Title Insurance Company, “21 Reasons For Title Insurance,” http://www.ctic.com/21Reasons.aspx.
[3] Meridian Title Corporation, “What is Title Insurance,” http://meridiantitle.com/pages-for-industry-resources-links/what-is-title-insurance.aspx.
[4] Id. In 2011 alone, title insurers paid approximately $1.02 billion in claims.

Elizabeth (Libby) A. Klesmith, Litigator, Business Counsel, Tuesley Hall Konopa, LLP

Author: Elizabeth (Libby) A. Klesmith is a civil litigation and business attorney at Tuesley Hall Konopa, LLP. Her practice areas include real estate, insurance defense, and trademark law. She is licensed to practice in Indiana and Michigan

You can contact Libby by calling 574.232.3538 or email eklesmith@thklaw.com

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.