What Is Title Insurance? Coverage In the Event of Hidden Claims

As the seller, you may pay for the buyer’s title insurance

There are two types of title insurance: the owner’s policy protects the buyer, and the lender’s policy protects the lender. Typically, if the seller pays for title insurance, they pay for the owner’s policy, although there may be cases where the buyer negotiates for the seller to cover both.

Owner’s policy

The owner’s policy protects the buyer if someone makes a claim against the home after they purchase it. The coverage amount is usually equal to the purchase price and lasts for the duration of ownership.

According to Fidelity National Title Insurance Company, it’s customary for sellers to pay for the owner’s policy in the following states:

• Alabama (negotiable, but usually the seller pays)
• Alaska (negotiable, but usually the seller pays)
• Arizona
• Arkansas
• Colorado (negotiable by contract, but usually the seller pays)
• Florida (usually the seller pays, but the buyer pays in some counties)
• Hawaii (typically, the seller pays for 60% of the policy)
• Idaho
• Illinois
• Indiana
• Kansas (usually the seller pays, but varies by location and contract)
• Michigan
• Missouri (usually the seller pays, but varies by location and contract)
• Montana
• Nebraska (typically, the seller pays for 50% of the policy)
• Nevada
• Oregon (seller pays for standard coverage, while the buyer pays the endorsements and extended coverage)
• South Dakota (the seller pays for 50% of the policy)
• Texas
• Utah (negotiable, but usually the seller pays)
• Washington (seller pays for standard coverage, while the buyer pays the endorsements and extended coverage)
• Wisconsin
• Wyoming

Additionally, it’s customary for sellers and buyers to negotiate who covers the owner’s policy in these states:

• California
• District of Columbia
• Georgia
• Iowa
• Kentucky
• Minnesota
• Mississippi
• New Mexico
• Ohio (usually divided equally)
• Oklahoma
• Tennessee
• Virginia

Lender’s policy

It’s rare for sellers to pay for the lender’s policy, also known as a loan policy; in most cases, the buyer pays for this cost. This policy protects the mortgage company from losses related to title issues. The lender’s policy typically insures the amount of the loan.

“Most people believe that the buyer is the one buying the house,” when in reality, it’s the mortgage company that’s putting up most of the money, D’Annunzio explains. “So the mortgage company wants to be covered.”

As the seller, there’s a higher chance your buyer may negotiate for you to pay for the lender’s policy in the following states:

• Colorado (negotiable by contract)
• Louisiana
• Nebraska (divided equally)
• Utah (buyer typically pays, but negotiable by contract)
• Virginia
• Wisconsin (buyer usually pays, but the seller provides a gap endorsement)

Title insurance costs

According to the American Land Title Association (ALTA), a large national trade group of title agents, the cost of the owner’s policy is based on the home’s purchase price, while a lender’s policy is based on the loan amount. Altogether, title insurance usually costs about 0.5% to 1.0% of the purchase price. For example, title insurance for a $300,000 home may range between $1,500 to $3,000.

Of course, the cost of title insurance varies by location. Some states even impose laws that standardize title insurance costs.

“In New Jersey, the cost of the insurance is regulated and predetermined by the state,” D’Annunzio explains. “So it doesn’t matter what insurance company you go to — it’s really just customer service that you’re shopping for.”

Circumstances where title insurance kicks in

As the seller, you don’t need to worry about title insurance once you’ve footed the bill. But just in case we’ve piqued your interest, here’s some additional context on when title insurance comes into play:

A lien was put on the property

A property lien is a legal claim against your property by a creditor that enables them to collect a debt they’re owed. Title insurance protects buyers if a lien is discovered after the title is transferred.

“If a contractor was not paid many years ago, a utility wasn’t paid, or there is an estate situation where the property was transferred but long lost, a lien can be put on the property,” explains D’Annunzio.

Encroachment

Title insurance kicks in if there is a previously unidentified encroachment issue. In this scenario, neighbors may dispute which part of the land belongs to them.

A long-lost heir claims they own the property

Title insurance comes into play if a relative or heir comes out of the woodwork and claims they own the title to the property during or after the home sale.

Paperwork was misfiled or lost

Misfiled paperwork or missing filings happen more often than you may think. “This is the biggest issue we see happen almost every week,” says D’Annunzio. “The seller may have paid off a previous loan or mortgage, but the company never recorded that letter of satisfaction with the county clerk or the county courthouse.” In this case, it will show up in the title company’s search, but these situations can typically be resolved easily.

Key takeaways

• As the seller, you may end up paying for your buyer’s title insurance.
• Customs for who pays for the title insurance (owner’s policy and lender’s policy) vary from state to state.
• Title insurance costs 0.5% to 1% of the purchase price on average.
• Some states have laws that regulate the cost of title insurance.

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