Owner’s Title Insurance: Is It Necessary or Required for Homeowners?
While most people are aware of and understand the need for a homeowner’s insurance policy (which covers property damage in the event your house is damaged by fire, flood, theft, etc.), many are unfamiliar with or don’t understand what an owner’s title insurance covers. Is it mandatory in Illinois, and if not, do you need to purchase the policy? Continue reading to learn about what an owner’s title policy is, what it covers, and whether or not you should purchase such coverage.
What is Owner’s Title Insurance?
When you purchase a home, you are taking on some risks that might not be apparent. You purchase the home under the assumption that everyone who owned the home before you filled out and filed all their paperwork correctly and that they did not engage in any fraudulent activity with relation to your property. If everyone did their part correctly, then you should own your home (i.e., “hold title”) free of any liens or encumbrances (other than those you know about, such as your mortgage).
If there was some problem along the chain of ownership before you, then a third party might be able to step in and sue you, claiming rights to your property. There are numerous ways in which a title issue can arise, such as:
- Improperly filed deeds, leading to confusion over property ownership;
- Falsified information on prior deeds;
- Mortgage fraud, if a prior owner lied about paying off their mortgage;
- Liens against the property, such as from unpaid homeowners’ association fees or unpaid contractors;
- Encroachments, such as if the property line between you and your neighbor is unclear and your neighbor claims part of your land;
- Easements, which allow some other party to use part of your property; and
- Back taxes.
To protect yourself from being sued due to these issues, prior to closing a title company can search the public records to determine if title is “clean” and can be passed to you without any such claims being brought against you in the future. Despite the search of public records, a dispute still may arise regarding a fraudulent deed or an item that was not disclosed in the public records. Owner’s title insurance covers you in the event there is a problem with the title, such as any of those listed above. If you suffer any damages or losses as a result of a title problem, owner’s title insurance kicks in to provide compensation to you and protect your ownership of the home.
Do I Need Owner’s Title Insurance?
In Illinois, there is no legal requirement for a buyer to purchase owner’s title insurance. Lenders normally require a prospective homebuyer to purchase a lender’s title insurance policy, which protects the lender in the event of a title problem, but this does not protect the homebuyer. (In some states, the seller is actually required to purchase the insurance policy to protect the buyer.)
If it’s not required, should you buy it? Before closing, you’ll enlist a title search company to check for any title issues. Unfortunately, title searches are not always perfect, and problems can arise down the line. Like every other type of insurance, owner’s title insurance is meant to protect against the 1% of situations in which it becomes necessary. If your title is challenged, you could incur significant losses. For example, if your ownership is challenged years down the line, you might lose out on your down payment and the equity you put into your home. Title insurance protects you against those losses.
Title insurance is thus a risk vs. reward calculation. Typically, it costs a couple of percentage points of the purchase price of your home. In many cases, your real estate agent will use a standard residential real estate contract in Illinois which requires the seller to cause a title company to run the title search and provide you with an owner’s title insurance policy at the expense of the seller. If not, you still might find that title insurance is worth the price for peace of mind. Talk to your Illinois residential real estate attorney about your home purchase to discuss your options for insurance and which works best for you.
If you need trusted advice and assistance with an Illinois real estate matter, get seasoned and effective legal help by contacting the Chicago residential and commercial real estate lawyers at Pluymert, MacDonald, Hargrove & Lee in Hoffman Estates at 847-310-0025 and in Des Plaines at 847-298-5030.