There are two types of policies for Title Insurance: Owner’s Title Insurance & Lenders Title Insurance.
Owner’s Title Insurance guarantees the buyer ‘Free and Clear Title‘ for as long as themselves or their successive heirs own the property. Clear title means that the title is free of any liens, defects, or encumbrances – in other words, it is insurance to make sure you actually own the property after you pay for it and close. What happens if somebody disputes your title? The Title Insurance Policy is like liablity insurance, they will defend a lawsuit on your behalf and either settle or go to trail. For Title insurance policies, they don’t have a claim that often, but when they do – they are in the 100’s to the multi Millions! Title companies review all of the documents in the public records and in their database which is known as their title “plant”. What the title company wants to see is a complete chain of title of ownership rights passing from one owner to the next with no gaps or missing periods.
Lenders Title Insurance is a buyer side closing cost for buyers that are obtaining financing. Lenders require buyers to get Lender’s title insurance to protect them from any future claim on title.
In general, I think most people are referring to Owners Title Insurance when they are talking about title insurance but it is good to note the difference.
While you are in escrow, the title insurance company will produce a preliminary title report (prelim) as part of the necessary disclosures that will tell you if the property has clear title or if there are any issues that need to be resolved before close of escrow. Pay extra attention to the list of “exclusions”, if there are any, on the Prelim – as these items will not be covered. Find out what needs to be done to remove exclusions. Any problems or defects the title company finds on their title search are known as “clouds” on title.