What Is an Owner’s Policy and Why Do You Need One?

An owner’s policy serves as a form of title insurance, providing protection for a property owner’s financial investment in their home. This policy offers assurance that the title insurance company will support the owner if a covered title problem arises after the property purchase. It is issued for the amount of the real estate purchase, safeguarding the buyer’s financial interest against potential loss due to title defects.

Understanding the Owner’s Policy

An owner’s policy protects against issues that existed in the past, specifically defects in a property’s title prior to the policy’s issuance, even if these were unknown at the time of purchase. Unlike traditional property insurance that addresses future events like fire or theft, title insurance covers historical claims against the property. It safeguards against financial losses stemming from title defects that occurred before the home was acquired.

The policy is purchased with a one-time premium paid at the close of the escrow process. This payment provides coverage that lasts as long as the owner, or their heirs, maintains an interest in the property. The primary role of an owner’s policy is to ensure the buyer has clear ownership of the property, offering protection against financial loss should a title defect invalidate their ownership.

Title insurance companies conduct thorough searches of public records to identify any liens, claims, or encumbrances on the property before issuing a policy. Despite these searches, some issues can remain hidden and surface later, making the owner’s policy an important safeguard. It functions as an indemnity insurance, shielding property owners from financial loss or damage resulting from various defects in the title.

Specific Protections for Property Owners

An owner’s policy provides comprehensive coverage against specific title defects that could jeopardize property ownership.

Errors or Omissions in Public Records

This includes incorrect names, deeds, or inaccurate legal descriptions of the property. Such clerical mistakes, if undetected, could lead to challenges to the rightful ownership.

Undisclosed Liens

Another common issue covered is undisclosed or unknown liens against the property. This can encompass mechanics’ liens from unpaid contractor work, judgment liens, or tax liens from previous owners. The policy defends against lawsuits asserting such claims and can cover the debt, preventing the new owner from being held responsible for past financial obligations.

Fraud or Forgery

The policy also protects against issues arising from fraud or forgery involving the title or other property documents. This includes instances where a deed might have been fraudulently executed or a previous transfer was not legitimate. Protection extends to claims made by missing or unknown heirs who might assert an ownership interest in the property.

Boundary Disputes and Easements

An owner’s policy can address problems related to incorrect boundary descriptions or disputes over property lines. It also covers undisclosed easements, which are rights for another party to use a portion of the property, potentially limiting the owner’s use. In these scenarios, the policy covers the legal costs of defending against title claims and and can provide financial compensation for actual losses, up to the policy limit, if the title cannot be cleared.

Distinguishing the Owner’s Policy from the Lender’s Policy

In real estate transactions, both an owner’s policy and a lender’s policy serve distinct purposes and protect different parties. A lender’s policy, also known as a loan policy, is a mandatory requirement when a lender issues a mortgage loan. Its primary function is to protect the mortgage lender’s financial interest in the property.

The lender’s policy ensures the lender’s security interest in the property has priority over any other claims that might arise. It safeguards the amount the lender has provided as a loan against title defects that could impair their lien. This policy’s coverage amount decreases as the loan is paid off and disappears once the mortgage is satisfied.

A lender’s policy offers no protection to the homeowner. It solely benefits the financial institution, securing their investment against title-related risks. An owner’s policy is a separate and necessary consideration for the buyer to protect their personal equity and investment in the home. Both policies are important in a real estate transaction, with the owner’s policy safeguarding the buyer’s equity and the lender’s policy protecting the lender’s security interest.

Acquiring and Activating Owner’s Policy Coverage

An owner’s policy is purchased and issued as an integral part of the real estate closing process, often through a title company. The cost for this policy is a one-time fee, rather than recurring premiums, and is paid at the time of escrow closing. This fee is generally based on the property’s value and location, commonly ranging from $1,000 up to several thousand dollars.

Traditionally, the seller of real estate pays for the owner’s policy at closing, though this can vary by region or be a point of negotiation between the buyer and seller. Buyers sometimes agree to cover part or all of these costs. The coverage provided by the policy begins at the time of closing and generally remains in effect for as long as the owner, or their heirs, holds an interest in the property.

Should a property owner discover a potential title defect after the purchase, the process involves making a claim with the issuing title company. It is important for homeowners to retain their policy documents and contact the title company promptly if any title-related concerns arise.