THE WILLIAMS LAWFIRM

ARTICLES

LAW BRIEF 
by David Paul Williams 
 
THE BENEFITS OF TITLE INSURANCE 
 
Title insurance is the engine that drives real estate transactions. Purchasers, sellers, lenders, home builders, real estate agents and the community in general all benefit from it. Title insurance reduces uncertainty in real estate transactions. How many purchasers would be willing to buy a home if they were uncertain about who owned the dirt under the home they wanted to buy?  
 
First things first. Title insurance is a contract under which an insurance company promises the policy holder defect-free title to property, subject to policy terms, conditions and exceptions. Covering the ins and outs of all terms, conditions and exceptions would require volumes and put every reader sound asleep so we’ll move on. 
 
Purchasers are willing to buy because the policy, in return for a single premium based on the value of the house, provides reasonable assurance that they get clear title. Purchasers also get reasonable assurance that a later discovered title defect will be covered. The insurance company will pay damages for valid claims and pay for the costs and legal expenses incurred in handling the claim. The policy covers the purchaser as long as they own the property and even after they sell if the property was conveyed by warranty deed. It gets better. In Washington, under the state-wide Multiple Listing Purchase and Sale Agreement, the seller pays the premium. 
 
Sellers are willing to list and sell their property because their owner’s title insurance policy provides assurance that they can deliver marketable title to the buyer. In the standard real estate purchase and sale agreement, the seller promises to deliver marketable title. In my thirty years of real estate practice, I have never allowed a client-purchaser enter into a contract unless the seller can deliver marketable title. Look at this way—who wants to buy an expensive lawsuit. 
 
In order to complete the usual buyer-seller transaction, someone needs to put up the purchase money. In the overwhelming majority of cases, that someone is a bank or private non-family member lender. Regardless of who puts up the purchase money, loan will be secured by a mortgage or deed of trust. The lender is concerned about the safety of the security because a defect in title would necessarily adversely affect the value of the security, thereby lessening the likelihood of loaning the purchase money. How to solve this potential dilemma? The purchaser buys a title insurance policy for the benefit of the lender. The policy remains in effect until the borrower repays the loan and the lender reconveys the deed of trust. 
 
Home builders are just a different brand of purchaser. Builders may by a single lot for single house or tens of acres for an entire planned development. Regardless of the amount of dirt involved, the builder has the same need for protection against defects in title as any other purchaser. Although difficult to quantify, title insurance actually allows the builder to sell the home for less because title insurance eliminates some of the risk involved in the initial purchase. 
 
Real estate agents benefit from title insurance because it promotes certainty in the transfer of land titles. Certainty in the transfer of title means more sellers are willing to sell and more buyers are willing to buy. The agent’s function is to facilitate a transaction between willing sellers and willing buyers. Insurance that promotes certainty and reduces uncertainty over defects in title makes the agent’s job easier. 
 
The community at large benefits from title insurance. It promotes a healthy real estate market and a healthy real estate market is the cornerstone of a healthy economy.

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