Why to Consider Title Insurance in Pennsylvania
Protecting against title failure and other financial risks in a real estate deal
on February 6, 2019
Updated on March 2, 2022
For the majority of people, buying a home is the single most important investment that they will ever make—and the same is true for businesses looking for commercial space. With so much on the line, it is imperative that real estate investors protect themselves against common risks. One of the most important forms of protection is title insurance. Should you get it? While some may say it depends on your circumstances, others, like real estate attorney Brett M. Woodburn, say it’s a must.
“Title insurance is critical to a real estate deal, in my opinion,” says Woodburn, of Tucker Arensberg in Lemoyne, who represents both commercial and residential buyers. “But most people don’t know how important it is.”
What is Title Insurance?
As noted by the Consumer Financial Protection Bureau (CFPB), title insurance provides protection for a real estate or homeowner—and mortgage lenders—in the event that someone else makes a claim on their property. When you purchase a home, or any other type of real estate, you will receive the deed to the property when the transaction is finalized. In the deed, the previous owner will state that they have transferred title (ownership) of the property to you. Title insurance protects you against any claims that have been filed against the property itself (against the title). Title insurance allows you to ensure that you are getting that title free and clear of any potential issues.
How prevalent are those issues? Woodburn puts it this way: “There are attorneys in Pennsylvania who make a very good living defending title claims on behalf of the insurance companies. The national average is 7 percent of all closings end up having a claim.”
Understanding the Benefits of Title Insurance
Consider the following scenario: You just purchased a new house. Two months after you moved in, you find out that there was previously a lien on the property. You never knew about this issue previously. A major financial institution claims that they have a right to your property—or that you must make a large payment to resolve the issue. In this situation, title insurance would protect you—no matter the underlying validity of the claim being raised against your property, you will be insured. As another example, a contractor may file a lawsuit against your property, claiming they were never paid for work that was completed before you obtained ownership. Once again, in this scenario, title insurance would offer full protection against their claim. Your title insurance policy will cover any potential claims that are being brought against the property, including a title failure.
“Title insurance, unlike other types of insurance, is backward-looking. We look from the date of closing backwards to see what the exposure is. If we find something in the record, we get it cleared up,” Woodburn says, citing items like easements and covenants. “There’s no coverage for that, and you know it’s a risk when you buy. The insurance is there for things that aren’t found—that you simply miss—or there’s fraud or an error in the chain of title. A lot of different things can come up.”
When Should I Get a Title Insurance Policy, and How Much?
In most cases, mortgage lenders require borrowers to obtain title insurance. “The lender will require title insurance for the amount of the loan,” Woodburn says. “But a lender’s policy is a declining policy. So if you have a mortgage for $200,000, in seven or eight years, you’ve paid it down to $125,000, well your title insurance is worth $125,000 now, not $200,000. It only covers the lender’s exposure.”
A lender’s policy is something property buyers get as a matter of course, Woodburn adds, but not every lender or title company will advise them about another protection that he recommends: an owner’s policy. Each state differs in how these work, he says, but “in Pennsylvania, it’s called a differential premium. So if you borrow $200,000 but the house is $250,000, the premium for the lender’s policy is, say, $1,000, and the owner’s policy is maybe $1,200. You’re not paying $2,200; you’re paying $1,200 for both policies. The extra premium is the differential between the owner’s policy and lender’s policy.”
The amount and scope of your insurance is an important aspect to consider, Woodburn says, and it’s worth asking a reputable attorney or title agent for their advice. There are relatively few situations in which it would not be advisable to purchase title insurance. It can be obtained at a relatively small cost considering the protection that it provides.
“You pay for it to protect against the unknown. That’s why you get insurance,” Woodburn says. “These are emotional purchases, and perhaps with the exception of kids, it’s one of if not the most financially and emotionally expensive investments you’re going to make.”
For more information on this area, check out our overview of real estate laws.