Why do you need a title opinion or title insurance?

When a lender is providing funds to a borrower involving real estate, the lender typically requires evidence of merchantable (good) title as a pre-condition to approving a loan. This evidence is usually in the form of a title opinion or title insurance.  Whether a title opinion or title insurance is ordered, on must consider the effect it has on the amount of the borrower’s loan costs and the scope of protection afforded to the lender.  Consequently, a borrower should be aware of the differences in title opinions and title insurance before deciding on the form of protection.

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What forms the basis of a title opinion and title insurance?

Both title opinions and title insurance policies are based upon the review of underlying title evidence which may be in the form of an abstract of title.  An abstract contains a summary of deeds, mortgages, leases, and other documents and matters of public record which affect title to real estate. When examining the abstract, an attorney seeks to identify any title defects that appear or are absent from the public records. Fundamentally, the review determines whether any previous owners lacked formal claims to the property as pending claims against "rightful" property owners can remain buried for years or decades.

 

After the title examiner reviews the abstract, he or she prepares an opinion or title insurance commitment which describes title defects or lists requirements necessary for the lender to acquire a valid security interest (mortgage lien) against the borrower's real estate.

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What are title opinions and title insurance?

Title opinions, also known as "attorney title opinion" or "statement of opinion", is basically an attorney's legal opinion of the current state of a property's ownership. An attorney produces a statement of title opinion through a careful review of a parcel's "chain of ownership". An attorney will limit the scope of opinion by stating who may rely on the opinion and what forms the basis of the title opinion. Title opinions are also subject to interpretation of the reviewing attorney. It is not uncommon for two attorneys after reviewing the same record to reach different opinions.

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Title insurance is an insurance policy protects the named beneficiary’s  financial interest in the property. A title insurance company issues a title policy after review of the abstract of the property's "chain of ownership" and receipt of the insurance premium. The title company limits the scope of the policy through stated exceptions on the title commitment and finally on the policy itself. While title companies may come to divergent opinions on as to the status of ownership, it is less impactful on the policy then it is on an opinion and results in differences in premium. 

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Shifting Risk

A title insurance policy is similar to an insurance policy, in regards to being issued in the name of a beneficiary. The named beneficiary  will receive the proceeds of the policy if a valid claim is made against the policy. A title opinion serves as an alternate to title insurance by shifting the risk an insurance company accepts for a premium to the attorney. Moreover, when a title opinion is used, the risk of loss is shifted from the owner or purchaser to the attorney. Consequently, while an insurance policy may cost 1-2% of the purchase price, the cost of title opinion is significantly higher. This is because the attorney is unable to spread the risks like an insurance company. While in most states, lender's utilize title insurance, some states will accept title opinion in lieu of formal title insurance. 

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Does one have more advantages over the other?

Title insurance has several advantages over title opinions and has consequently become the preferred method of protection for the lender.  Defects later discovered in the title are better handled by the submission of a claim with the title insurance company than by seeking to recover directly from the attorney who drafted the opinion.  In addition, title insurance has broader coverage than title opinions.  Unlike a title opinion, title insurance covers risks of forgeries in the chain of title, altered instruments, instruments obtained by fraud or duress, instruments executed by incompetence, and defects caused by mistaken identity.  Although borrowers will see slightly higher transaction costs by purchasing title insurance, the additional coverage of a lender’s title insurance policy will give greater protection.

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Want More Information or Still Have Unanswered Questions?
The above comments are intended as an introduction to basic concepts of title opinions, title insurance, and potential legal issues that may be involved in a real estate transaction and not legal advice or opinions. If you have any questions, you should