Title Insurance and Title Guarantees: What’s the Difference? (Ins. Code § 12340.1)

Underwood-Blog-Images-2-2-300x300“Title” is the single most important word when it comes to purchasing a property. If there is a problem with it, then an entire real estate transaction can be disrupted or canceled outright. Many people consider the purchasing of a home to be the single most important transaction of their lives. Therefore, it only makes sense that there would be options to assuage the worried buyer. 

These options come in the form of insurance and guarantees. But while they may serve the same set of individuals, they could not be more different. The Underwood Law Firm, P.C. is familiar with how to navigate property transactions and understands the importance of knowing these differences for those looking to buy property, especially in California. 

What is Title Insurance? 

Title insurance is a means of insuring one against any potential losses that may result from differences between the actual title (the title valid in the eyes of the law) and the record title (what the deed says the title is). 

By statute, it is defined as insuring, guaranteeing, or indemnifying owners of real property… against loss or damage suffered by reason of (a) unexpected liens or title defects, (b) invalidity of liens on the title, or (c) incorrect searches relating to the title. (Ins. Code § 12340.1) 

Importantly, title insurance is usually not a title guarantee. “A policy of title insurance is not a representation that the title is in the condition described… [it is] merely that the insurer will pay any loss or damage suffered by the insured from any omitted defect [in the title].” (Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1191.) 

In essence, a title insurance policy is “a contract to indemnify against loss caused by defects in title or encumbrances on the title. It is not a representation that the title is in any particular condition.” (Smith v. Commonwealth Land Title Ins. Co. (1986) 177 Cal.App.3d 625, 631.) 

I received a Preliminary Title Report. Why would I need Title Insurance? 

Once a buyer and seller begin the process of transacting for real property, buyers almost always hire a title insurance company to research the status of the title. Once the company is hired, they issue buyers a “preliminary report.” 

Preliminary reports are furnished to buyers “in connection with an application for title insurance and are [themselves] offers to issue title policy subject to the stated exceptions set forth in the reports…” (Siegal, 46 Cal.App.4th at 1190.) 

These reports typically contain a legal description of the property, outstanding liens and property taxes, and any restrictions and covenants running with the land or title. Given this information, some buyers may wonder why title insurance would be necessary. After all, any problems with the title are listed in the report. This isn’t really the case.

In California, by statue, preliminary reports are not abstracts of title. “Any report shall not be construed as, nor constitute, a representation as to the condition of title to real property, but shall constitute a statement of the terms and conditions upon which the issuer is willing to issue its title policy.” (Ins. Code § 12340.11.) 

For example, “Shawn” and “Julie” are in the process of buying a beautiful property. They enlist a title company to give them a report on the state of the title. The report comes back clean, so Shawn and Julie decide that title insurance is just an additional expenditure they do not need. 

Unfortunately, once their purchase of the home is complete, they discover that their title is defective. Even if they want to, Shawn and Julie cannot sue the title company on the basis of the report because the report is not a title guarantee. Preliminary reports simply cannot constitute a representation by the title company of the condition of the title. (Southland Title Corp. v. Superior Court (1991) 231 Cal.App.3d 530, 537.) 

What is a title abstract company, and what do they do? 

Buyers can be rightfully concerned about title insurance and preliminary reports. For those especially risk-averse buyers, however, there exists title abstraction. 

Title abstract companies prepare title abstractions (also called abstractions of a title), which are written representations that are intended to be relied upon by the person seeking it. 

Thus, where a preliminary report or title insurance sets out information to induce the buyer into buying insurance, an abstract of the title is an actual representation of all of the recorded documents associated with the title. (Ins. Code § 12340.10.) 

In short, “an abstract is a summary of the record without exceptions, and is a representation that the title is in the condition described, which often contains an opinion regarding the condition of title…” (Siegel, 46 Cal.App.4th at 1191.) For that reason, some buyers may seek out a title abstraction to be sure of the condition of the property they’re buying. 

What is a title guarantee? 

While title insurance companies are mainly focused on issuing insurance policies, they can also issue guarantees. There are many types of title guarantees, and all of them serve to provide information regarding titles while simultaneously ensuring that the information provided is indeed accurate. 

One of the more common forms of a title guarantee is the litigation guarantee. These are used when a property owner knows they are about to enter a lawsuit related to property, such as for a quiet title action or, most commonly, a partition. 

The Property owner, or lawyer, will purchase the guarantee, and it will provide information divided into schedules, which detail whether taxes were paid, what mortgages and liens are active, the type of estate in which the property is held, and other pertinent information relating to litigation. 

In addition, litigation guarantees are admissible into evidence, making them even more crucial for suits involving real property. 

How can the attorneys at the Underwood Law Firm, P.C. assist you? 

Buying or selling a home can be an exhilarating feeling. But those positive emotions can quickly turn negative when a title dispute arises. The importance of property cannot be understated, and every safeguard should be employed to ensure that a title defect is a remote possibility. 

As each case is unique, property owners would be well-served to seek experienced counsel familiar with the ins and outs of real estate transactions. At the Underwood Law Firm, P.C., our knowledgeable attorneys are here to help. If you are concerned about a potential title defect, worried about the quality of your title insurance, or if you just have questions, please do not hesitate to contact our office.

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