Everything You Need to Know About Title Insurance

Title Insurance Coverage

Title insurance protects homeowners from hidden risks that could affect their ownership rights. These risks often predate the purchase of the property and may not be discovered during even the most thorough title search. 

Common hidden risks to the title include:

• Errors in public records
• Unknown liens or encumbrances
• Forgery or fraud in title documents
• Undisclosed heirs claiming ownership

Other less common risks can include boundary disputes, improperly recorded documents, and easements not discovered in public records. Enhanced title insurance protection covers certain risks that may occur after the policy date.

For example, honest errors can occur in public records, such as a misrecorded property description or an incorrectly indexed deed. These mistakes can happen due to human error during the recording process at county offices, where staff may accidentally transpose numbers or file documents in the wrong place. These inaccuracies persist over time, potentially affecting multiple property transactions, but would be hidden or undiscoverable during a title search.

Title insurance protects property owners from both minor threats, such as HOA liens, and more significant threats such as ownership claims from undisclosed heirs. Coverage lasts for as long as you or your heirs own your home. This means that even if an issue arises years after closing day, you’re still protected.

Types of Title Insurance Policies

Title insurance comes in different forms to protect various parties involved in a real estate transaction. Lenders typically require a lender's title insurance policy (also known as a loan policy), which safeguards their financial interest in the property. 

For homeowners, there are two types of policies available: standard and enhanced. The standard policy covers the most common risks to title. The enhanced policy offers broader protection, including some post-policy issues such as post-policy fraud or a mechanics lien filed after closing.

Title insurance policies are purchased through your title company, which is a broker for a title insurance underwriter. 

The Cost of Title Insurance

The cost of a title insurance policy is calculated as a percentage of the purchase price of your home or property. In Kentucky, these rates are regulated by the state insurance commission, ensuring consistency across providers. 

Generally, the cost of a standard owner’s title insurance policy amounts to about 0.5% of the property's purchase price. Enhanced policies are typically about 10% more expensive than standard policies. Your title insurance provider can provide you with an accurate estimate of the cost. 

While the upfront cost may seem significant, title insurance is relatively affordable when compared to the potential risks it mitigates. For instance, on a $300,000 home, a title insurance policy might cost around $1,500. This one-time fee provides protection against risks that could potentially cost hundreds of thousands of dollars to resolve. No deductible is required for title insurance claims.

For example, imagine the owner of this $300,000 home receives a certified letter from a previously unknown heir of the former owner two years after closing on the home. This letter states that the heir has a rightful claim to 50% ownership of the property. The heir asserts that they were wrongfully excluded from the will and are seeking to claim their share of the property’s value.

Without title insurance, the homeowner could face a legal battle that could cost thousands of dollars in attorney fees. If the court rules in favor of the heir, the homeowner would also be responsible for paying $150,000 (half the property’s value) to retain full ownership. Other costs, such as a new property survey and updated deed recordings, may also be incurred. 

In Kentucky, the buyer pays for both the owner’s and lender’s title insurance policies unless otherwise negotiated. 

Where to Buy Title Insurance

Title insurance is underwritten by large insurance providers who assume the financial risk associated with the policies. While underwritten by these large companies, title insurance is typically sold by local title insurance companies or brokers. For example, Bluegrass Land Title works with several reputable underwriters including First American Title Insurance Company, Fidelity National Title, Stewart Title and Guaranty Company, and Old Republic Title.

Your local title company will handle all aspects of issuing title insurance. Their services include conducting the title search and examination, clearing any issues found, and issuing the final policies. They work closely with the underwriter throughout this process. 

Title insurance is usually purchased at the time of closing as part of the overall closing costs. However, if you didn't obtain a policy at closing, you generally have up to 30 days after closing to purchase one. This grace period can be helpful if you initially declined coverage but later reconsidered. Keep in mind that any title issues that arise during this period may complicate or prevent you from obtaining a policy.

The Title Insurance Claims Process

If you encounter a title issue, the claims process for title insurance is designed to be straightforward and easy for covered homeowners.

1. Contact your title insurance provider. Note: this is the policy underwriter, not the title insurance broker. If you're not sure who your underwriter is, your title company can point you in the right direction.
2. File a claim and provide any relevant documentation to verify your coverage.
3. Once your claim is filed, the title insurance company will handle the rest of the process, including investigating the claim and resolving the issue. 

For example, imagine a homeowner discovers the existence of an undisclosed easement that wasn’t revealed during the initial title search on their property allowing a neighboring farm to use part of their land for access to a water source. The homeowner would contact their title insurance company to file a claim. 

The title company would investigate the claim and, if the claim is valid, there’s no more for the homeowner to do. The owner’s title insurance policy would cover legal counsel to review the easement’s validity and to facilitate negotiations with the neighboring property owner. It would also cover the costs of resolving the issue, which could include legal fees, compensation for loss of property value, or even a purchase of the easement from the neighbor. 

Myths about Title Insurance

There are countless myths that surround title insurance. Let's address four of the most prevalent misconceptions. 

Myth #1: You're being charged twice for title insurance

While you may see two title insurance policies on the settlement statement, you’re not getting double-charged. One of these charges is for the loan policy, which protects the lender’s interest in the property up to the amount of the loan. This policy provides coverage until the loan is satisfied. 

The other charge is for the owner’s title insurance policy, which protects the owner’s full equity in the property (up to 150% of the purchase price of the home for enhanced policies). This policy provides coverage for as long as the homeowner or heirs own the property. 

Remember, these are two distinct insurance policies with different coverage amounts, durations, and beneficiaries.

Myth #2: Title insurance is the same as homeowner's insurance

While both title insurance and homeowner’s insurance may seem to protect your property, title insurance protects your ownership rights while homeowner’s insurance protects from loss due to potential damages to the home or property itself. 

For example, if your roof suffered damage during a recent hailstorm, you would file a claim with your homeowner’s insurance provider. However, your homeowner’s policy won’t help you if your ownership rights are threatened in any circumstance. The premium for a homeowner’s policy is usually paid annually, while your title insurance premium is paid in full at closing. 

Myth #3: Title insurance is unnecessary since you already have a clear title

Before you close on your home, the title company has conducted a thorough title search to identify any issues with the home’s title. All of these issues will be resolved before closing. This means the homeowner can complete the purchase without any known issues clouding their ownership rights. However, it's important to understand the limitations of a title search.

Title examiners are skilled professionals, but they can only work with the information available to them. They examine the property's abstract and accessible public records, but they cannot predict future events or uncover information that isn't part of these records. For instance, a title search cannot detect forged documents, misfiled records, or liens that may surface after closing. Title insurance serves as a safeguard against these unforeseen issues.

Myth #4: Title insurance isn't needed for new construction and other newer homes

Some people believe that because a property is new, there's no risk of title issues. However, title problems can affect even brand-new homes. The same hidden risks that affect older homes can also affect newer homes or properties. 

The land the home is built on has a history, and issues relating to the land's title can impact your ownership rights. Additionally, there could be liens related to recent construction, boundary disputes with neighboring properties, or zoning violations. Title insurance protects against these risks, regardless of the age of the structure.

The age of the home doesn’t determine the need for title insurance; rather, it’s the potential for unforeseen issues with the property’s title that makes title insurance an important purchase for every property. 

Title insurance is an essential safeguard for homeowners, protecting you and your investment from hidden risks that may threaten your ownership rights. With a one-time premium that provides lifetime coverage, it offers lasting peace of mind. 

As you consider your options, remember that an informed decision is the best decision. For more information about title insurance or to discuss your specific coverage needs, reach out to the experienced title professionals at Bluegrass Land Title. We're here to answer your questions and guide you through the title and closing process from start to finish.