Title Insurance Principles and the Need for Title Insurance
Why title insurance exists
Title insurance is a contract of indemnity that protects an insured against loss from defects in title that already existed on the policy date. Three contrasts drive most exam questions. First, title insurance is retrospective - it insures the past, not future events. Second, the premium is paid once at closing and the owner's policy remains in force indefinitely, with no renewals. Third, because the insurer searches and examines the record before insuring, a large share of the premium covers the cost of examination, curative work, and defense rather than anticipated losses.
Core concepts to know
An owner's policy is issued in the purchase price and does not decrease over time except as loss payments are made. A lender's (mortgagee) policy is issued in the loan amount, decreases as the loan amortizes, and terminates on payoff; the lender's policy does not protect the buyer. The insurer's duty to defend is broader than its duty to pay - it may have to defend an insured against a groundless claim - and defense costs do not erode the policy limit, while indemnity payments do. Understand Schedule A (date of policy, insured, estate, record title, amount), the difference between marketable title and insurable title, and why a title abstract or commitment is not a policy.
Traps
Questions describing an event that occurred after the date of policy - a new judgment against the insured, a neighbor's new fence, the insured's own later conveyance - are outside the covered risks. Title insurance is not a warranty of title, and it does not guarantee that the property is buildable, free of physical defects, or worth the purchase price.
Rule of thumb
If the defect predates the policy date and does not appear in Schedule B-II, argue coverage; if it arose later, look for an endorsement or for the insured's own conduct as the cause.
Worked example: a $400,000 owner's policy, a $50,000 pre-existing mortgage surfaces, and the insurer spends $30,000 defending. The policy amount drops to $350,000, but the defense expense does not reduce it.