What title insurance is, and what it actually covers

Title insurance covers ownership problems that already existed when a property changed hands but weren't discovered during the title search: undisclosed liens, forged signatures in the chain of ownership, missing heirs, mis-recorded deeds, and similar defects in the public record.1 The premium is paid once at closing, and the policy lasts as long as the buyer owns the home (or, for the lender's policy, as long as the loan is outstanding).

Most insurance covers things that might happen in the future. Title insurance is different in that it covers problems that already existed but nobody noticed. Most homebuyers encounter it as a line on the closing cost estimate and don't think about it again, but the mechanics are worth understanding because what the policy actually covers is more limited than the name suggests.

What "title" actually refers to

The title to a property is the legal record of who owns it and what claims exist against it. A clean title means the seller has the right to transfer ownership and there are no outstanding liens, easements, or competing claims that the buyer would inherit. The title search (usually performed by a title company or a real estate attorney before closing) examines public records (deeds, mortgages, tax liens, court judgments, divorce decrees, probate filings) to confirm the title is clean before the deed is transferred.

The search is thorough but not perfect. Records can be misfiled, signatures can be forged, prior owners can have undisclosed heirs, and judgments can be filed under variant name spellings. The title search catches the visible problems; title insurance covers the ones that come up later.

Two policies, two different interests

Almost every residential closing involves two title policies, often confused:2

The two policies are issued by the same title company at the same closing. The lender's policy is required; the owner's policy is a buyer choice. The owner's policy is the one most buyers don't fully understand and sometimes decline to save a few hundred dollars, which is often a poor trade.

What the owner's policy actually covers

A standard owner's title insurance policy typically covers:3

What it does not typically cover: zoning violations, building code violations, environmental hazards, or anything the buyer agreed to in writing (an easement disclosed at closing, for instance). It also typically excludes things the buyer knew about and accepted before closing, the policy is for unknown defects, not known ones.

What it costs

Title insurance pricing varies significantly by state. A handful of states (Florida, New Mexico, Texas) have state-promulgated rates, meaning every title insurer charges the same premium for the same policy. In most other states, rates are filed by individual insurers and can vary.

Typical owner's title insurance premiums are 0.4% to 0.8% of the purchase price, paid once at closing. On a $400,000 home, that's $1,600 to $3,200. The lender's policy is usually less, since it covers the loan amount rather than the purchase price and decreases over time. In states that aren't rate-regulated, comparing two or three quotes is sometimes worth the effort.

The closing-costs estimator at /tools/closing-costs models both title-insurance lines and surfaces which states have promulgated rates.

A common gotcha

In states where the seller customarily pays for the owner's policy, buyers sometimes assume they're covered without realizing the lender's policy and the owner's policy are separate. They are. The lender's policy doesn't protect the homeowner. If the title-policy line on the closing statement shows only the lender's policy, the buyer is unprotected against post-closing title defects.

Whether the seller or the buyer pays for the owner's policy is a matter of state custom and contract negotiation. The closing statement is the document that confirms which policy is being issued and to whom.