Do I REALLY need that owners title insurance policy?

I am often asked by home buyers whether they really need to buy owners title insurance. The answer is an unequivocable "absolutely". I know insurance is one of those products that people love to hate—you spend a lot of money on something you hope you will never need, but isn’t that the point? Owners title insurance provides a whole lot of protection on the most valuable investment most people will make in their lives. The premium is paid only one time, at the purchase of the policy, and the protection remains in effect, with an inflation factor on the coverage, for as long as you own the home. Not such a bad deal.

So what does owners title insurance cover? In my view the most important thing it insures against is human error. In preparing for a purchase, a title search will be done at the registry of deeds. Said registry of deeds is run by humans, and errors in the indexing of documents are inevitable. If a name is misspelled, or some other irregularity occurs as a document is input into the system, it may not thereafter show up in a chain of title search. Among other things, title insurance protects against many defects in title that a proper registry search would not reveal.

The benefit of owners title insurance is more often not that it indemifies for a loss, but rather that it provides "costs of defense" in the event of a claim. In truth, most title defects are fixable, and it is rare that a property owner experiences a total loss of title. Costs of defense means that if an insured defect in your title is discovered, the title insurance company will step in and take the responsibility to cure it. One of the most common uses of title insurance is the situation when you are about to sell your house, and a few days before closing you are notified that an old mortgage from a prior owner in the chain of title was never discharged, or that the discharge was in some manner defective. Without owners title insurance, odds are the closing will get postponed while you scramble to track down a lender who may have merged 4 times since the original transaction in order to get the correct discharge. If you have an owners policy, on the other hand, in most cases your title insurer will agree to indemnify the new buyer, lender and title insurance company and clean up the problem, without any delay in closing.

Title insurance companies have developed several different levels of policy coverage, and they do vary somewhat among the companies. In addition to insuring clear title, the standard owners policy insures against (a) forgeries in documents; (b) incompetency or incapacity of a signatory; (c) missing signatures; (d) undisclosed (but recorded) prior mortgages, liens, easements or restrictions; (e) errors in legal descriptions; (f) lack of a right of access; and
(g) deeds not properly recorded.

"Extended" or "enhanced" policies, which are available for about 10% more, also cover against such additional defects (depending on the policy) as: (a) off-record matters, such as claims for adverse possession or prescriptive easements; (b) encroachments; (c) off-record liens such as mechanics' or estate tax liens; (d) certain violations of land use (subdivision and zoning) laws; and (e) certain post-policy occurrences.

The loan policy that you will be required to purchase for your lender as part of your closing costs does not provide you as owner with any protection, so don’t be fooled. You need your own owners policy. If you purchase both the loan and owners policies simultaneously, the combined premium is discounted from the total amount which would be paid if they were purchased separately. Premiums are calculated at a fixed dollar amount per thousand of coverage, and in Massachusetts the premiums at present are the same among all title insurance companies.

So the next time you are buying a property and are asked whether you want the owners title insurance coverage, say yes. Don’t be "penny wise and pound foolish" and use this opportunity as a place to save on closing costs. Be sure to include the owners policy premium when calculating your probable total purchase expenses, and do the smart thing and buy the owners policy. Yes, it is one of those products that you hope you never need, but if it turns out you do need it and did not get it, you will be sorry.