Definition
Title insurance protects against financial losses caused by defects in a property's ownership history, such as forged deeds, missing heirs, unreleased old liens, or clerical recording errors. An owner's policy protects the buyer's investment in the home, while a lender's policy protects the amount of the loan, and both are typically issued at the same closing. Unlike homeowners insurance, it's paid as a single one-time premium at closing rather than as an ongoing bill, and it protects against problems from the past rather than future events. For a homeowner selling a house, resolving title insurance and paying for the buyer's policy is a routine, expected part of most closings. Title insurance is unusual among insurance products: it protects against problems that already exist in the past record rather than future events, and it is paid once at closing rather than annually. There are two separate policies — a lender's policy protecting the mortgage, and an owner's policy protecting the buyer's equity — and only the owner's policy protects the person buying the house.
Example
Two years after buying his house, Nathan was contacted by a previously unknown heir claiming a partial ownership interest based on an old family estate issue from decades earlier. He was alarmed at first, worried he might lose part of his home or have to pay a large settlement to make the claim go away. Because Nathan had purchased an owner's title insurance policy at closing, he simply filed a claim with the insurer instead of hiring his own attorney out of pocket. The title company assigned legal counsel to review the claim and respond to the alleged heir on Nathan's behalf. The title company covered his legal defense, and the matter was resolved without costing him anything out of pocket. Nathan later said that small one-time premium turned out to be one of the best purchases he made during his entire closing. For a seller, the relevance is who pays and what gets cleared. Local custom determines whether the seller or the buyer pays for the owner's policy, and it appears on the settlement statement alongside the search, escrow and recording charges.