Though title insurance is not always required, and complications with the title are relatively rare, when they occur, they can be costly. Title companies (agents and underwriters) search public records to make sure title to property can be transferred without issue. Through diligent searching, problems such as liens are typically resolved BEFORE the deal can be brought to closing. Yet, even the most careful search by experienced title professionals is sometimes not enough. An insurance policy can shield the insured from covered title risks.
A title insurance policy is a contract of indemnity, whereby the title company agrees to insure the insured against loss under the policy. The title insurance company, in exchange for a premium, agrees to pay the insured for loss or damage it suffers because of undisclosed liens or other matters that affect the property as of the date of the policy. The title company’s monetary exposure is directly limited to the face amount of the policy. The title policy also includes the duty to defend the insured against any lawsuit that attacks the insured’s title, so long as the lawsuit is based on a title defect that the title company insured against.
But remember that a title insurance policy is not a guarantee of title. Title companies do not guarantee that title is as stated in the title policy but rather insure against loss. The coverage of the title policy is not unlimited because the title policy coverage is subject to the exceptions shown in Schedule B, the policy’s Exclusions, and the policy’s Conditions.
An unreleased mortgage?
When you take out a loan, and use your property as security for that loan, the bank records its mortgage in the county where the property is located. This is to give notice to everyone (these are public records) that it has an interest in your property. But let's say that you pay the mortgage off. The bank should record a release of that mortgage to show the world it no longer has an interest in the property.
However, sometimes a release has not been recorded because there is little incentive in making sure the release is recorded. Recording a release of mortgage can be an afterthought to a real estate transaction that paid off the mortgage, such as a refinance. The paid off lender should record a release, but the parties were allowed to proceed with the transaction, and the bank itself has been paid off. Perhaps the bank had tried to record a release but it was rejected by the county recorder. Note on Illinois statute: Note on Illinois law: ***DEADLINES**
Consequently, land title records can be littered with mortgages that are not released and the title company is often asked to secure a release. Generally speaking, it is the mortgagee (the bank) that should prepare and record a release properly and often it is the mortgage document itself that calls for this. However, as to the title insurance policy issued to the new owner or lender, old mortgages might be waived or insured over via endorsement such as the Identified Risk Coverage endorsement.
A legal description error?
A legal description is a formal way to show where a property is located. There are many potential types of errors in such a description, rising from the trivial (such as a minor typo) to the critical (an incorrect measurement or the wrong lot or block number.) The important thing to note is that a legal description is only truly wrong if it fails to describe the property, its location, or gives rise to confusion.
Often, documents containing legal descriptions will have other ways to identify the real estate, such as an address or tax/parcel identification number. Courts can rule this information sufficient if a question is raised as to the completeness of a legal description. The title company can fix confusion in the historical legal description by making sure the correct legal description is used in the current insured conveyance. Note on Illinois case law: An instrument of conveyance must contain sufficient terms such that the subject property may be identified with reasonable certainty. Generally, this may be accomplished through reference to governmental survey, lots and blocks, metes and bounds, or by reference to a plat. When uncertainty exists, the intention of the parties controls, with extrinsic evidenced introduced as necessary to adduce that intent. Werling v. GRosse, 76 Ill App. 3d 834 (5th Dist. 1979) Note on Illinois statutes: I, please note that if it is alleged the written legal description is incorrect or has an error, the listed PIN may be correct, which may correspond to the correct legal description. By this method, the examiner is reliably referred to the correct legal description. In 35 ILCS 200/1-80, Sec. 1-80. reads, "Legal Description; Proper Description; Description. The describing of property (a) by reference to government surveys or by metes and bounds; (b) when subdivided into lots and blocks, by reference to duly recorded plats, or (c) by reference to an index number established in accordance with Section 9-45." (Source: P.A. 86-1481; 87-877; 88-455.) Note on Illinois statutes: In 35 ILCS 200/1-120, Sec. 1-120. reads, "Property Index Number or Permanent Index Number; PIN. A number used to identify a parcel of property for assessment and taxation purposes. The index number shall constitute a sufficient description of the property to which it has been assigned, wherever a description is required by this Code. 'Property Index Number' and "'ermanent Index Number' shall be construed to be interchangeable terms. The changes to this Section made by this amendatory Act of the 97th General Assembly shall be construed as being declaratory of existing law and not as a new enactment." (Source: P.A. 97-557, eff. 7-1-12.)
A missing interest? Or a break in the chain of title?
Land (real property) usually has many owners throughout its history. A property owner can transfer land through a deed or other instrument of conveyance. Sometimes, a proposed transfer is brought into question when the past series of transfers (the chain of title) is thoroughly examined.
For example, a person who had an ownership interest is not listed on and does not sign the deed that would have transferred their ownership rights to the next person. This issue may be raised on a title exam and then the title commitment. Usually, this can be resolved by working with the title company, which may ask for a prior policy of title insurance or additional clearance, such as an affidavit of heirship or a deceased joint tenancy affidavit, to clear up the matter.