What is Defective Title Insurance?

What is Defective Title Insurance?

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A property with a defective title can cause many problems when it comes time for the homeowner to sell. Though the term “defective title” is one that is generic in terms of its use, the effects that such a title can have on a property transaction are far from benign.

Hazards of a Defective Title

A defective title can be defined as an instance in which it is possible for a party unrelated to either the buyer or the seller to establish or attempt to establish a right or interest that is counter to the owner’s claim to the property. This can result in the property owner being required to pay for damages or other compensation. A defective title can also prevent or reduce the development of the property. In some cases, the owner of the property could be forced to turn over a portion of the property or even relinquish it entirely.

Common Defective Title Issues

While the matters that can render a title defective can cover a considerable range, there are some defective title issues that occur more frequently than others.

Lost Title Deeds

Lost title deeds can occur when some or even all of the deeds to a particular property have been either destroyed or lost. These lost deeds could contain information that pertains to the property, such as rights, easements and other unknowns that have the potential to affect the property.

References to Other Deeds

In some cases, a registered title, or other related documents, can contain references to deeds or other title documents that are unavailable. Without these documents in hand, the property could be subject to unknown conditions that might adversely affect the present owner, as well as any who own the property in the future.

It’s Not an Absolute Title

A title that is a qualified title, registered possessory title, good leasehold title or any other instance in which it is not an absolute title could be classified as one that is defective.

Adverse Third Party Rights

A title to a property can be subject to the rights of a third party — whether those rights are known or unknown. If this is the case, the result is that the title is classified as one that is defective because of its potentially adverse effects on the owner.

The Purpose of Defective Title Insurance

Because problems with a defective title can put the property owner at risk for disputes or claims regarding the property, its presence can create financial liability or affect the way the owner can use or develop it. This can make it difficult to sell the place without the protection of defective title insurance.

Benefits of Obtaining Defective Title Insurance

In some cases, it might be possible to open negotiations with the third party involved and work toward a mutually-satisfactory conclusion. This approach tends to be more time consuming and expensive than simply opting for defective title insurance at the outset. In many cases, working directly with the third party results in the requirement of obtaining defective title insurance in order to reach a resolution to the issue.

Obtaining defective title insurance can also provide the property owner with protection from financial losses arising from situations such as a reduction in market value, defense costs, damages or compensation as stipulated by the courts and more.

Defective title insurance provides the seller with a means of protection in the event the unthinkable happens. As a method of protection, defective title insurance could be an economical way for a property owner to compensate for damages out of their control.