What is Home Owner Insurance?

Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home.

The cost of homeowners insurance often depends on what it would cost to replace the house and which additional riders - additional items to be insured - are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to earthquakes, floods, "Acts of God", or war

(whose definition typically includes a nuclear explosion from any source) are excluded. Special insurance can be purchased for these possibilities, including flood insurance and earthquake insurance.

The home insurance policy is usually a term contract - a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms. Perpetual insurance, which is a type of home insurance without a fixed term, can also be obtained in certain areas.

In the United States, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender always requires that the buyer purchase homeowners insurance as a condition of the loan, in order to protect the bank if the home were to be destroyed. Anyone with an insurable interest in the property should be listed on the policy. In some cases the mortagagee will waive the need for the mortgagor to carry homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In a case like this even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan. The insurance crisis in Florida has meant that some waterfront property owners in that state have had to make that decision due to the high cost of premiums.

Types of Homeowners Insurance

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and issued a simplified homeowners policy for resell to insurance companies. These policies have been amended over the years until currently, the ISO has seven standardized homeowners' insurance forms in general and consistent use. Of these HO-3 is the most common policy followed by HO-4 and HO-6. Others that are less used, though still significant, are HO-1, HO-2, HO-5, and HO-8.

HO-1:

HO-2:

HO-3:

HO-4:

HO-5:

HO-6:

HO-8:

In addition, a Dwelling Fire policy is generally available for non-commercial owners of rented houses, covering property damage to the structure, and sometimes to the owner's personal property (such as appliances and furnishings). The owner's liability is generally extended from their own primary home insurance, and does not comprise part of the Dwelling Fire policy. It is a counterpart to the HO-4 renter's policy.

Homeowners Insurance Information

When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don't have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.

There are three ways to insure the structure of your home:

1. Replacement Cost:
   Insurance that pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.
   
2. Guaranteed Replacement Cost:
   Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120 percent of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.
   
3. Actual Cash Value:
   Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house. To find out the building rates in your area, consult your local builders association or real estate appraiser.

Factors that will determine the cost to rebuild your home:

• local construction costs
• the square footage of the structure
• the type of exterior wall construction -- frame, masonry (brick or stone) or veneer
• the style of the house (ranch, colonial)
• the number of bathrooms and other rooms
• the type of roof
• attached garages, fireplaces, exterior trim and other special features like arched windows.

Also be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an "INFLATION GUARD CLAUSE" to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area. Also, be sure to increase the limit of your policy if you make improvements or additions to your house.

What is Mortgage Insurance?

Mortgage Life Insurance refers to an insurance policy that guarantees repayment of a mortgage loan in the event of death or, possibly, disability of the mortgagor. Private Mortgage Insurance (PMI) refers to protection for the lender in the event of default, usually covering a portion of the amount borrowed. There are Government loan products that also include a Mortgage Insurance Premium (MIP), essentially the government equivalent of PMI.

For example, Mr. Kenneth obtains a mortgage loan that exceeds 80% of his property's value and/or sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects their institution against his default. To obtain a mortgage loan insured by the Federal Housing Administration, Mr. Smith must pay a mortgage insurance

Types of Mortgage Insurance

Private Mortgage Insurance (PMI) is default insurance on mortgage loans, provided by private insurance companies. PMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home's purchase price. Often, PMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation (this generally requires two years of on-time payments first)

Mortgagee's Title Insurance is a policy that protects the lender from future claims to ownership of the mortgaged property, generally required by the lender as a condition of making a mortgage. In the event of a successful ownership claim from someone other than the mortgagor, the insurance company compensates the lender for any consequent losses. Mortgagor's Title Insurance is a policy protecting the buyer/ owner of real property from successful claims of ownership interest to the property. The coverage usually is supplemental to a Mortgagee's Title Insurance policy, and the premium is customarily paid by the buyer.

What is Private Mortgage Insurance?

Definition of Private Mortgage Insurance

Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

Private mortgage insurance also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage

market liquidity, which in turn, allows mortgage companies to continue originating new loans.

Lender Mortgage Insurance & PMI

Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI), is insurance payable to a lender that may be required when taking out a mortgage loan. It is insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property. The annual cost of PMI varies between 0.19% and 0.9% of the total loan value, depending on the loan term, loan type and proportion of the total home value that is financed.

The LMI / PMI may be payable up front, or it may be capitalized onto the loan. This type of insurance is usually only required if the down payment is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the LMI / PMI is no longer required. This can occur via the principal being paid down, via home value appreciation, or both.

PMI Cancellation

Mortgage insurance can usually be canceled by the home buyer after he or she has at least 20 percent equity in the home. Borrowers should contact their servicer to find out the procedure for canceling mortgage insurance when they think they have achieved 20 percent equity. Guidelines for canceling private mortgage insurance are set by investors. Typically, investors will require an appraisal on the property. The servicer can recommend qualified local appraisers.

Canceling mortgage insurance can be a difficult process. Sometimes lenders will require that LMI / PMI be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that. The cancellation request must come from the Servicer of the mortgage to the PMI Company who issued the insurance. Often the Servicer will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.

If a borrower has less than the 20% down payment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference. Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% down payment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% down payment. Other combinations of second mortgage and down payment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums were not until 2007.

LMI/PMI tax deduction

In the United States, homeowners earning under $110,000 adjusted gross income can deduct, for the 2007 tax year, some or the entire LMI/PMI premium on mortgages closed only in 2007. With this new change, homebuyers may want to weigh both options. Congress would need to renew this deduction to be valid for any tax years beyond 2007. In 2007, mortgage insurance will be tax-deductible.

Mortgage insurance will be tax-deductible in 2007. For some homeowners, the new law means it will be cheaper to get mortgage insurance instead of getting piggyback loans.

The 109th Congress passed the tax law in its final hours. Hundreds of thousands of homeowners will save a total of $91 million when they file their tax returns in 2008, according to estimates by the mortgage insurance industry.

According to an analysis by Amer Zafar (CEO of iMortgageSites - Mortgage Website Design Firm), a homeowner with a mortgage of $180,000 would save about $350 in taxes a year because of the law. That assumes that the borrower has good credit and is in the 25 percent tax bracket.

When you buy a house, lenders consider you a riskier borrower if you make a down payment of less than 20 percent. There are two main ways to make you pay for that risk: mortgage insurance and piggyback loans.

Mortgage insurance is the old-school method. You, the borrower, pay for the policy, but the lender is the beneficiary. If you fall behind on the loan payments and the lender has to foreclose, the mortgage insurance policy reimburses the lender for legal costs and lost income. The premiums depend on the size of the loan, the percentage of the down payment, your credit score and the type of mortgage insurance you get (private, from a number of companies, or public, from the Federal Housing Administration, Department of Veterans Affairs or Rural Housing Service).

Piggyback loans are the new-wave method of dealing with a down payment of less than 20 percent. When you use a piggyback, you get two home loans: a primary loan for 80 percent of the house's value and a second mortgage for the rest of the money you need. Getting a piggyback eliminates the need for mortgage insurance.

The piggyback can be either a fixed-rate home equity loan or a variable-rate home equity line of credit. The piggyback has a higher rate than the first mortgage.

For years, piggybacks had a big advantage because the mortgage interest on both loans was tax-deductible, while mortgage insurance payments were not. Now that has changed, with caveats.

1. The tax deduction applies only to mortgages that are closed in 2007. If you have a loan with mortgage insurance in 2006, you won't be able to deduct the premiums in the 2007 tax year unless you refinance in 2007.
   
   
2. There are income limits. You get the full deduction if your adjusted gross income is $100,000 or less.
   
   
3. This is a one-year deal, and Congress would have to renew the deduction to make it apply for the 2008 tax year and beyond.
   
   
4. If you take the standard deduction instead of itemizing deductions, the new law makes no difference to you. "You need to have a mortgage of about $130,000 or so to even pay enough interest to hurdle the standard deduction.

PMI Payment Options

Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and amount of coverage required by the mortgage company.

Under an annual plan, an initial one year premium is collected up front at closing, with monthly payments collected along with the mortgage payment each month thereafter. Monthly plans allow a borrower to pay only 1 or 2 months worth of premium at closing, and then on a monthly basis along with the regular mortgage payment. Under a single premium plan, the entire premium covering several years is paid in a lump sum at closing. Typically, homebuyers choose to add the amount of the mortgage insurance premium to the loan amount. By doing this, homebuyers can reduce their closing costs and increase their interest deduction.

PMI vs FHA MIP

Although the insurance protection concept is similar, there are differences between private mortgage insurance and FHA mortgage insurance. FHA insurance is a government-administered mortgage insurance program that does have certain restrictions. FHA has maximum regional loan limits that are lower than those with private mortgage insurance. FHA may be more expensive, take longer to receive approval, and have fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private mortgage insurance which is cancelable in most circumstances. FHA is a good choice for some borrowers with credit history problems that might need special assistance.

Should I Avoid PMI?

Private Mortgage Insurance (PMI) is intended to make homeownership possible for people who want to buy a home but who can't afford a 20% down payment. It is insurance required on loans that cover more than 80% of the home's value, in order to protect the lender from possible default on the loan. A fee is charged by the insurance company for the mortgage insurance, which must be paid in addition to the principal and interest on a loan. Once the loan-to-value ratio (LTV %) of the property is below 80%, however, either through paying down the loan or through the appreciation of the property, PMI can be canceled.

In response to consumer demand for low down payment loans with as few fees as possible, lenders have begun to offer alternatives to PMI: two mortgages. This usually occurs in the combination of an 80% first mortgage, a 10% second mortgage, and a 10% down payment; but variations also occur, such as a 75% first, a 20% second, and 5% down or 80% first mortgage second, 20% as 100% financing.

Borrowers should discuss carefully with their lenders or brokers what the monthly and long-term costs are for PMI and non-PMI options. The smaller, second mortgages usually carry a shorter term (e.g., 15 years) and a higher interest rate than the first mortgage, and thus may increase the borrower's monthly outlay. However, paying for PMI will also mean an increase in monthly payments.

You should keep in mind two considerations about PMI and second mortgages. First, PMI is a fee being charged on the entire amount of the home loan - which may, in the long run, be a larger dollar amount than the second mortgage amount. Second, interest paid on a second mortgage may be tax-deductible - PMI is not.

Let's examine the costs of PMI. As an example, let's say a borrower takes out a loan that is 90% of the value of the home, or 90% loan-to-value (LTV), and is charged 0.25% for PMI. For that extra 10% above the 80% PMI threshold, the borrower is paying an extra 0.25% on all 90%. In the final calculation, the extra 10% is costing the borrower a full 2.25% more over the life of the loan. A borrower who plans to own his or her home for a longer period of time (generally 5-7 years or more) may find paying a slightly higher percentage for a second mortgage more palatable than paying PMI.

A good counterexample is a borrower who may only plan to own his or her home for a very short term - perhaps only a year or two. Because the monthly payment for PMI is likely to be less than a payment on a second mortgage, the borrower will have more funds available on a monthly basis to pay for improvements or other investments. He or she will still have paid less over the year or two of ownership by paying PMI rather than paying a second mortgage.

There is no single answer to the PMI question. What this means is that you should work with your loan officer or broker to determine whether paying PMI will best suit your needs. You may not have much cash for a down payment, but can make a substantial monthly payment; you may feel that the property will appreciate rapidly, which might allow you to cancel PMI in a year or two; or you might plan to stay in the property for 15 years or more, in which case you may be looking for the lowest costs over the long term. Your loan officer will be able to help you evaluate which option will best suit your needs and your unique situation.

What is Title?

Title, in law, the means by which the owner has just and legal possession of his / her property. It is distinct from the document (e.g., a deed) that is evidence of the title. Title can be lost or acquired only by the methods established by law, that is, by inheritance or by purchase. Several persons may have different titles to the same property. While one holds a legal title (a claim to the land that is recognized by a court), another may hold an equitable title (the right to have the legal title transferred to him if certain conditions are met). This occurs if there is a mortgage on the land. If a person holds land free of all encumbrances he may claim to have perfect title. When property is purchased, a title search is made to make certain that the seller is the legitimate owner of the title he is selling; the resulting document is an abstract of title.

Title Deed:

A deed or document containing or constituting evidence of ownership.

What is Title Insurance?

Definition of Title Insurance:

Title insurance is insurance against loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. It is available in many countries but it is principally a product developed and sold in the United States. It is meant to protect an owner's or lenders financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an

easement, lease or life estate. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance.

What is Title Insurance?

Title insurance, unlike other forms of insurance, such as automobile or life insurance, involves a one-time premium, paid when you close the real estate transaction. When you purchase title insurance, you don't have to make monthly, quarterly or yearly payments as you do with car and life insurance. Unlike medical and casualty insurance premiums, which are paid to insure against an unpredictable future event, title insurance guarantees that all events in the past have been cleared. This is an important distinction. Since a title company has searched and evaluated the condition of the title to your property, title insurance guarantees that the title company has not missed any items which may affect your property.

The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, as humans we are never 100% right! Title insurance means that you can make a claim in the event that the conditions of your title are not as we say it is. In fact, title insurance companies set aside a percentage of their profits to pay for any claims that arise.

In actuality; however, the number of claims is relatively small. When your escrow closes, the title company will issue you a policy of insurance. Keep this with your home records, as a copy of it will come in handy in the unlikely event that a problem does arise. Title companies keep records that go back decades, so we will always be ready to back up our policy.

A Word About Real Estate:

Real estate has traditionally been a family's most valuable asset. It is a form of wealth that is protected by many laws. These laws have been enacted to protect one's ownership of real estate and the improvements located on the land. The owner, the owner's family, and the owner's heirs have extremely b rights or claims in and to the property that you are buying. Those who may have an interest in or lien upon the property could be governmental bodies, contractors, lenders, judgment creditors, the Internal Revenue Service, or various other individuals or corporations. The real estate may be sold to you without the knowledge of the party having a right or claim in and to the property. In addition, you may purchase the real estate without having any knowledge of these rights or claims. In either event, these rights or claims remain attached to the title to the property that you are buying until they are extinguished.

The Past Title Can Determine Your Future

Generally, a person thinks of insurance in terms of the payment of future loss due to the occurrence of some future event. For instance, a party obtains automobile insurance in order to pay for future loss occasioned by a future "fender bender" or for the future theft of the car. Title insurance is a unique form of insurance. It provides coverage for future claims or future losses due to title defects which are created by some past event (i.e., event prior to the acquisition of the property.) These risks are far less obvious than those protected against by automobile insurance, but can be just as devastating. The following information will answer some commonly asked questions about title insurance.

Will You Get Clear Title?

It is of utmost importance that you receive clear title to the property when you purchase real estate. In order to do so, you must first be informed of any existing rights or claims that may, in the future, threaten your title and possession to the property. Title insurance provides you with this twofold protection.

How Do You Find Out What Claims Exist?

In order to determine the status of title, The Title Company conducts a diligent search of the public records for those documents associated with the property. Title Company then examines those recorded documents in order to determine if there are any rights or claims that may have an impact upon the title to the property. The title search may reveal the existence of recorded defects, liens or encumbrances upon the title such as unpaid taxes, unsatisfied mortgages, judgments and tax liens against the current or past owners, easements, restrictions and court actions. These recorded defects, liens and encumbrances are reported to you prior to your purchase of the property. Once reported, these matters can be accepted, resolved or extinguished prior to the closing of the transaction. In addition, due to the title insurance, you are protected against any recorded defects, liens or encumbrances upon the title that are unreported to you and which are within the coverage of the particular policy issued in the transaction. This is the first benefit you receive from title insurance.

What About Undiscovered Claims?

The title to the property that you have purchased could be seriously threatened or lost completely by hazards which are considered "hidden risks." "Hidden Risks" are those matters, rights or claims that are not shown by the public records and, therefore, are not discoverable by a search and examination of those public records.

Matters such as forgery, incompetency or incapacity of the parties, fraudulent impersonation, and unknown errors in the records are examples of "hidden risks" which could provide a basis for a claim after you have purchased the property. In order to protect you against this possibility, the Title Company provides insurance coverage for such claims. This is the second benefit you receive from title insurance.

How Does a Title Insurance Policy Protect Against All These Claims?

If a claim is made against your insured title, the Title Insurance Company protects you by:

1. Defending your title, in court if necessary, at no cost to you
   
   
2. Bearing the cost of settling the case, if it proves valid, in order to protect your title and maintain your possession of your property.

Title Insurance Protects Your Asset

Title insurance gives you the assurance that possible clouds on title to the property you are purchasing - which can be discovered from the public records - have been called to your attention that those defects can be corrected before you buy. Additionally, it is insurance that if any undiscovered claims covered by your policy arises out of the past to threaten your ownership of real estate, it will be disposed of, or you will be reimbursed exactly as your title insurance policy provides.

Only One Premium

Unlike other forms of insurance, the original premium is your only cost as long as you or your heirs own the property. There are no annual payments to keep your Owner's Title Insurance Policy in force.

Why do you need Title insurance?

To protect possibly the most important investment you'll ever make - the investment in your home. With a title insurance policy, you as owner, have an indemnity contract that will reimburse you for loss in the event someone asserts a claim against your property that is covered by the policy.

How can there be a title defect if the title has been searched?

Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.

What title insurance protects against

Here are just a few of the most common hidden risks that can cause a loss of title or create an encumbrance on title:

1. False impersonation of the true owner of the property
2. Forged deed, releases or wills, Instruments executed under invalid or expired power of attorney;
3. Undisclosed or missing heirs; Mistakes in recording legal documents
4. Misinterpretations of wills Deeds by persons of unsound mind
5. Deeds by minors
6. Deeds by persons supposedly single, but in fact married
7. Fraud
8. Liens for unpaid estate, inheritance, income or gift taxes

What protection does title insurance provide against defects and hidden risks?

Title insurance will pay for defending against any lawsuit attacking your title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect as long as you, or your heirs, retain an interest in the property.

Why Title Insurance Exists in the United States

Title insurance exists in the US in great part because of a comparative deficiency in the US land records laws. Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government makes the determination of title ownership and encumbrances on the title based on the registration of the instruments transferring or otherwise affecting the title in the applicable government office. With only a few exceptions, the government's determination is conclusive. Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property.

A few jurisdictions in the United States have adopted a form of this system, e.g., Minneapolis, Minnesota and Boston, Massachusetts. However, for the most part, the states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid. The reason for this is probably that it is much less expensive to operate than a land registration system; it doesn't require the number of legally skilled employees that the registration systems do.

Greatly simplified, in the recording system, each time a land title transaction takes place, the transfer instrument is recorded with a local government recorder located in the jurisdiction (usually the county) where the land lies. The instrument is then indexed by the names of the grantor (transferor) and the grantee (transferee) and photographed so it can be found and examined by anyone who wants to see it. Usually, the failure by the grantee to record the transfer instrument voids it as to subsequent purchasers of the property who don't actually know of its existence.

Under this system, determining who owns the title requires the examination of the indexes in the recorders' offices pursuant to various rules established by state legislatures and courts, scrutinizing the instruments to which they refer and making the determination of how they affect the title under applicable law. (The final arbiters of title matters are the courts, which make decisions in suits brought by parties having disagreements.) Initially, this was done by hiring an abstractor to search for the documents affecting the title to the land in question and an attorney to opine on their meaning under the law, and this is still done in some places.

However, this procedure has been found to be cumbersome and inefficient in most of the US. Substantial errors made by the abstractor or the attorney will be compensated only to the limit of the financial responsibility of these parties (including their liability insurance). Some errors may not be compensated at all, depending on whether the error was the result of negligence. The opinions given by attorneys as to each title are not uniform and often require time consuming analysis to determine their meanings.

Title insurers utilize this recording system to produce an insurance policy for any purchaser of land, or interest in it, or mortgage lender if the premium is paid. Title insurers use their employees or agents to perform the necessary searches of the recorders' offices records and to make the determinations of who owns the title and to what interests it is subject. The policies are fairly uniform (a fact that greatly pleases lenders and others in the real estate business) and the insurers carry, at a minimum, the financial reserves required by insurance regulation to compensate their insureds for valid claims they make under the policies.

This is especially important in large commercial real estate transactions where many millions of dollars are invested or loaned in reliance on the validity of real estate titles. As stated above, the policies also require the insurers to pay for the costs of defense of their insureds in legal contests over what they have insured. Abstractors and attorneys have no such obligation.

Comparison with other insurance

Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance generally insures against losses caused by title problems that have their source in past events. This often results in the curing of title defects or the elimination of adverse interests from the title before a transaction takes place. Title insurance companies attempt to achieve this by searching public records to develop and document the chain of title and to detect known claims against or defects in the title to the subject property. If liens or encumbrances are found, the insurer may require that steps be taken to eliminate them (for example, obtaining a release of an old mortgage or deed of trust that has been paid off, or requiring the payoff) before issuing the title policy. In the alternative, it may "except" those items not eliminated from coverage. Title plants are sometimes maintained to index the public records geographically, with the goal of increasing searching efficiency and reducing claims.

The explanation above discloses another difference between title insurance and other types: title insurance premiums are not principally calculated on the basis of actuarial science, as is true in most other types of insurance. Instead of correlating the probability of losses with their projected costs, title insurance seeks to eliminate the source of the losses through the use of the recording system (see Recording (real estate)) and other underwriting practices. As a result, a relatively small fraction of title insurance premiums are used to pay insured losses. The great majority of the premiums are used to finance the title research on each piece of property and to maintain the title plants used to efficiently do that research.

There is significant social utility in this approach as the result conforms to the expectations of most property purchasers and mortgage lenders. Generally, they want the real estate they purchased or loaned money on to have the title condition they expected when they entered the transaction, rather than money compensation and litigation over unexpected defects.

Types of Title Policies

Standardized forms of title insurance exist for owners and lenders. The lender's policies include a form specifically for construction loans, though this is rarely used today. There are basically two types of title insurance policies - one for property owners and one for lenders. Policies for both owners and lenders are written according to guidelines set down by either the California Land Title Association (CLTA) or the American Land Title Association (ALTA). However; some people do request the additional residential coverage provided by the ALTA RESIDENTIAL policy, which usually requires a physical inspection and covers some items not covered in the CLTA owner's policy. Here is a summary of the types of policies and what they cover:

Owner's Policy

CLTA POLICIES

CLTA HOMEOWNER'S POLICY:

This is a new and enhanced policy which is now the standard in residential policies. The CLTA Homeowner's Policy (or, as we call it, the Eagle Policy) insures:

• Ownership of the property
• That there is access if the property abuts upon an open, public, dedicated street
• That there are no forgeries or failed conveyances in the chain of title
• That the insured has a marketable interest in the real property

In addition, the Eagle Policy offers some expanded features not available in other policies:

• Coverage for building permit violations incurred by previous owner
• Protection against forgeries which may occur in the future to cloud title
• Protection in the event a structure encroaches into the insured property
• Enhanced right of access coverage, including vehicular and pedestrian access
• Several other features including Subdivision Map Act coverage, Restrictive Covenant Violations coverage, Structural Damage from
• Mineral Extraction coverage, Map Inconsistencies coverage and Post Policy Increase in Value to 125%.

CLTA OWNERS INSURANCE:

This is the most common type of owners' insurance available for any commercial property, residential real property and vacant land. The CLTA policy insures:

• Ownership of the property
• That there is access if the property abuts upon an open, public, dedicated street
• That there are no forgeries or failed conveyances in the chain of title
• That the insured has a marketable interest in the real property

The CLTA Owners Policy insures all recorded matters affecting title to the property in order of their priority. In other words, it will show the lender of the first mortgage before the lender on the second mortgage because the first lender has priority.

The CLTA policy may also be ordered by lenders, normally on second deeds of trust by individuals and non-banking or savings and loan lenders. When the CLTA policy is ordered for lenders, it insures all types of property, normally on second deeds of trust by individuals and non-banking or savings and loan lenders. The CLTA policy does not cover:

• Matters which a correct survey would show
• Unrecorded matters
• Matters which a physical inspection of the property would disclose
• Rights of parties in possession
• Unpatented water and mineral rights
• Matters known, created or assumed by the insured

ALTA OWNERS POLICY

Do not confuse this with an ALTA residential owners policy. This is the broadest form of insurance given in California. This policy requires an ALTA survey to be provided to the title company. In addition to the coverage given by a CLTA policy, it insures:

• Encroachments
• Access
• Rights of parties in possession
• Unrecorded liens and encumbrances
• Taxes
• Matters which correct survey would show

An ALTA owner's policy does not cover matters known created or assumed by our insured.

When this policy is requested, we may require:

• An ALTA survey (usually at a cost of between $3,000 and $7,000)
• A field inspection by our chief title officer
• A check with all utilities to make sure they have no unrecorded easements
• Copies of all leases and or tenant lists

ALTA RESIDENTIAL POLICY

The ALTA Residential Policy is an owner's policy insuring owners of 1-4 family residential lots or condominium units. In addition to the basic coverage provided by the CLTA policy, the ALTA residential policy protects the insured against losses caused by:

• Mechanic Liens (labor and material liens) arising out of work done on the property which the insured did not agree to or agree to pay for
• Major encroachments - The insured is protected against forced removal of an existing structure (other than a boundary wall or fence) because it extends onto adjoining land or onto an easement
• Unrecorded interest arising from off record leases, contracts or option
• Zoning Compliance (as long as property in question and zoning are both residential) CC&Rs compliance

Most title companies will insure a seller carry back deed of trust under an ALTA residential policy by endorsement (an addendum to a title policy with a small additional cost). This is the only type of deed of trust that may be insured under this policy.

The owner's policy insures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those which are listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable the policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverages, expanded forms of residential owner's policy exist that cover additional items of loss.

The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverages can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state or county on this matter which is reflected in most local real estate contracts. Consumers should inquire about the cost of title insurance before signing a real estate contract which provides that they pay for title charges. A real estate attorney, broker, escrow officer (in the western states), or loan officer can provide detailed information to the consumer as to the price of title search and insurance before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy

ALTA LENDERS POLICY

The ALTA Lenders Policy is for institutional lenders only (such as banks and savings and loans). It insures lender priority and the fact that it is marketable. It covers both recorded matters as well as unrecorded matters such as:

• Encroachments
• Unrecorded easements
• Access
• Loss of priority
• Unrecorded liens and encumbrances.

The coverage on this policy is quite broad. A survey or inspection is often required before a policy is issued this policy can be issued on all types of real property.

This is sometimes called a loan policy and it is issued only to mortgage lenders. Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions.

The American Land Title Association ("ALTA") forms are almost universally used in the country though they have been modified in some states. In general, the basic elements of insurance they provide to the lender cover losses from the following matters:

1. The title to the property on which the mortgage is being made is either
   
• Not in the mortgage loan borrower,
• Subject to defects, liens or encumbrances, or
• Unmarketable.
  
2. There is no right of access to the land.
   
3. The lien created by the mortgage:
   
   • is invalid or unenforceable,
   • is not prior to any other lien existing on the property on the date the policy is written, or
   • is subject to mechanic's liens under certain circumstances.

As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack.

Elements 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Element 3 covers matters that will interfere with its foreclosure.

Of course, all of the policies except or exclude certain matters and are subject to various conditions.

There are also ALTA mortgage policies covering single or one-to-four family housing mortgages. These cover the elements of loss listed above plus others. Examples of the other coverages are loss from forged releases of the mortgage and loss resulting from encroachments of improvements on adjoining land onto the mortgaged property when the improvements are constructed after the loan is made.

Land Title Associations

In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy "jackets" (standard terms and conditions) for Owner's, Lender's and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not issue title insurance; they provide the policy forms that title insurers issue.

Some states, including Texas and New York, may mandate the use of forms of title insurance policy jackets and endorsements approved by the state insurance commissioner for properties located in those jurisdictions, but these forms are usually similar or identical to ALTA forms.

Construction Loan Policy

In many states, separate policies exist for construction loans. Title insurance for construction loans requires a Date Down endorsement which recognizes that the insured amount for the property has increased due to construction funds that have been vested into the property.

Earthquake Insurance

Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary home-owners insurance policies do not cover earthquake damage.

Most earthquake insurance policies feature a high deductible, which makes this type of insurance useful if the entire home is destroyed, but not useful if the home is merely damaged. Rates depend on location and the probability of an earthquake. Rates may be cheaper for homes made of wood, which withstand earthquakes better than homes made of brick.

As with flood insurance or insurance on damage from a hurricane or other large-scale disasters, insurance companies must be careful when

assigning this type of insurance, because an earthquake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company's resources. Insurance companies devote much study and effort toward risk management to avoid such cases.

California

Earthquake insurance has become a political issue in California, whose residents purchase more earthquake insurance than residents of any other state in the U.S. After the 1994 Northridge earthquake, nearly all insurance companies completely stopped writing homeowners' insurance policies altogether in the state, because under California law (the "mandatory offer law"), companies offering homeowners' insurance must also offer earthquake insurance. Eventually the legislature created a "mini policy" that could be sold by any insurer to comply with the mandatory offer law: only structural damage need be covered, with a 15% deductible. Claims on personal property losses and "loss of use" are limited. The legislature also created a quasi-public (privately funded, publicly managed) agency called the CEA California Earthquake Authority. Membership in the CEA by insurers is voluntary and member companies satisfy the mandatory offer law by selling the CEA mini policy. Premiums are paid to the insurer, and then pooled in the CEA to cover claims from homeowners with a CEA policy from member insurers. The state of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds, nor will it cover claims from non-CEA insurers if they were to become insolvent due to earthquake losses.

Flood Insurance

Flooding is not covered by a standard home-owners insurance policy.

To determine if you need flood insurance, ask your insurance professional, Mortgage Company or neighbors about the flood history in your area. If there is a potential for flooding, you should consider purchasing a policy that covers the structure and your personal belongings.

Flood insurance can be purchased from an insurance agent or company under contract with the Federal Insurance Administration (FIA), part of the Federal Emergency Management Agency (FEMA). Flood insurance is only available where the local government has adopted adequate flood plain management regulations under the National Flood Insurance Program (NFIP).

Industry Profitability

The title insurance industry is a profitable one. In 2003, according to ALTA, the industry paid out about $662 million in claims, about 4.3% percent of the $15.7 billion taken in as premiums. By comparison, the boiler insurance industry, which like title insurance requires an emphasis on inspections and risk analysis, pays 25% of its premiums in claims.

Comparing claims with premiums tells only part of the story, because, for example, title insurance companies have marketing expenses not incurred by the boiler insurance industry. Also, the boiler insurance inspections do not provide the certainty of risk level that the recording laws provide for title insurers. But the industry's profitability is also hinted at by the repeated instances of state regulators uncovering cases where title insurers have engaged in illegal marketing tactics. Although owners are free to

shop around for title insurance, many owners defer such decisions to lenders or real estate agents, and title insurance companies have sometimes used illegal tactics in marketing to those decision-makers. Illegal tactics noted in a CNN/Money article include kickbacks, free vacations, and the free use of office space and equipment. The article noted that in 2005 alone over a dozen title insurers settled with regulators for tens of millions of dollars over these practices.

Further evidence of the industry's profitability can be found by comparing the title insurance costs in the 49 states where such insurance is issued with the costs associated with the state-run Title Guaranty Program in Iowa, where title insurance is illegal. The program is run by the Iowa Finance Authority. It costs $110 for up to $500,000 in coverage in the state; after adding costs for the services of an abstractor (who does the research on the property) and the legal fees, such a title guaranty costs about $400.00, versus the $1,100.00 paid for that same home in other states (based on figures cited by the Iowa Bar Association).

In many states, the price of title insurance is regulated by a state Insurance Commissioner. In these states, such as Florida, the rate for the insurance premium cannot be controlled by the industry. Unlike other forms of insurance such as life, medical or home owners; title insurance is not paid for annually, it has one payment for the term of the policy, which is in effect until the property is resold.