A title company ensures that the title assigned to a piece of property is valid, and free of liens and other encumbrances. If the title is valid, then the title company issues title insurance to on that piece of property to assure the buyer that the property can be sold. Title insurance protects either the lender, the owner, or the buyer, from lawsuits or claims against the property that are related to its title. The title company then handles the paperwork in closing, and files the necessary documents with the appropriate agencies. To explore this concept, consider the following title company definition.
Definition of Title Company
- A company that checks the validity of a property’s title and, if valid, issues title insurance to that property.
What Does a Title Company Do
A title company makes sure that the title to a property is valid, and free of liens and other problems. Once that has been verified, the title company then issues title insurance to that property. Title insurance is important because it protects the lender and the buyer of the property from lawsuits or claims that could originate from issues with the title.
Another example of a title company’s duties is the maintaining of escrow accounts. Escrow accounts contain the funds necessary for settlement and closing costs. Title companies generally conduct the formal closing on a property. At the closing, for example, the title company collects all of the necessary documents for sale of the property, including real estate contracts, mortgage documents, and title. The title company’s escrow officer reviews all of the documents to make sure there are no problems, then meets with the parties to obtain signatures on all of the necessary documents.
The escrow officer will explain the process to the parties, collect the closing costs, and distribute payments from the buyer to the seller. Once the sale of the property has closed, the title company ensures that all of the necessary paperwork, including the new titles and deeds, are filed with the appropriate agencies.
In order to ensure that the title to a property is valid, the title company will perform a title search. A title search is like a background check of the property, in that it is a thorough analysis of all of the records related to that property. This analysis will determine whether or not the person or company who is claiming ownership of the property does, in fact, legally own that property, and that no one else can claim full or even partial ownership.
A title search will also determine whether there are any outstanding mortgages, judgments, unpaid taxes, or liens on a property, as well as any other issues that could negatively affect a person’s ownership of, or ability to sell, the property. Title companies may also institute a property survey, which establishes the boundaries of the plot of land. The survey will highlight whether or not the home sits within the property boundaries, as well as whether or not the neighbors are improperly encroaching upon the property.
Once these processes have been completed, the title company will prepare what is called an abstract of title. This is a short summary detailing what was found during the title search, which establishes the history of ownership over that particular parcel of property. Following the creation of the abstract of title, the title company will create a title opinion letter. The title opinion letter is a legal document that confirms the title’s validity.
What is Escrow
There are several different kinds of escrow, but in the simplest terms: escrow is the process by which a third party holds onto something valuable during a transaction.
Escrow and Offers
When an offer on a property is made and accepted, any monies for the transaction are held in an escrow account, rather than going directly to any of the parties. There it is held until the entire transaction has been completed and documents signed, at which time the escrow company disburses the funds to all of the appropriate parties. This process protects all of the parties’ interests in the transaction. For example, a title company will hold deposit monies, fees for inspections and surveys, and other funds necessary to complete the transaction.
Escrow and Closing
The closing of escrow occurs when a purchase is complete. A closing officer, or “escrow officer,” oversees the final paperwork and handles the exchange of funds and the recording of the deed. The officer will ensure that the money is appropriately distributed and that all of the necessary documents are signed and recorded before closing the escrow.
What is Title Insurance
Title insurance is an insurance policy that protects lenders and/or buyers against any claims or lawsuits that could come up with regard to who owns the property. There are two categories of title insurance: owner’s and lender’s title insurance. While owner’s title insurance protects the owner (new buyer) of the property from title-related issues, lender’s title insurance protects the mortgage company.
The person buying the house pays for the lender’s title insurance when he closes on the house. Some buyers also take out an owner’s title insurance policy.
Tom buys a home from Jack, and pays for both lender’s and buyer’s title insurance. However, Sara just came forward to claim that she is actually the rightful owner of the house. If, in fact, the title was wrong, and Sara really is the rightful owner, then Tom’s insurance policy will pay him for the value of the house. They will also pay the lender the amount the lender lent to Tom so that he could buy the house.
Title Company Example in Breach of Title Insurance
In October of 2004, Robert and Judith Kimble bought real estate from Dorene Dempster and Mark Herrell, a couple who had previously purchased the property from another couple, John and Jane Stevenson. When the Stevensons were given the title to the property, they were issued a warranty deed. A warranty deed is a deed issued by a seller that guarantees that a property’s title is cleared of liens and judgments.
Included in this piece of property was a private road. The warranty deed granted an easement of the private road. This meant that, despite the fact that the road was part of the Stevensons’ private property, it was very near the county highway, and so the general public could use the otherwise private road to access the highway. On the same day that the Stevensons purchased the property, Land Concepts, Inc. recorded an easement that did not include the private drive.
When the Kimbles eventually purchased this property years later, they obtained title insurance from First American Title Insurance Company. Four years after purchasing the property, the Kimbles attempted to sell it. However, Land Concepts sent the Kimbles’ realtor a letter advising that the Kimbles’ private drive was, in fact, property belonging to Land Concepts, and that the Kimbles did not have legal access to it. The Kimbles could not transfer access rights they didn’t own to any prospective buyer, which would bring the overall value of their property down.
Three months later, Land Concepts notified the Kimbles that their access rights were going to be permanently revoked if the access issue was not resolved. Meanwhile, the Kimbles had hired an attorney who notified First American that the Kimbles had an issue that was ripe for a claim under their title insurance. The grounds for the claim were, of course, the Kimbles’ lack of access, as well as the fact that the property had become less marketable due to the removal of the access rights.
In 2009, the Kimbles sued Land Concepts and all of the former owners of their property. Their goal was to have the court clear up the issue of the easement, and to pursue a breach of title insurance claim against First American.
The Kimbles eventually settled with everyone but First American Title. Land Concepts agreed to provide an easement for the existing driveway in exchange for $40,000. The Stevensons agreed to pay the Kimbles $10,000, and the Kimbles agreed to sign over their rights and interest in the First American title insurance policy to the Stevensons.
In August of 2010, the Stevensons filed a cross-claim against First American Title, complaining that First American breached their contract and the fiduciary duty they owed to the Stevensons. The matter proceeded to a jury trial. The jury was entrusted to decide whether or not First American breached its contract with the Kimbles and, if so, if the Kimbles had suffered any losses as a result of that breach. Also for the jury to decide, was whether or not First American had acted in bad faith.
The jury ultimately decided that, yes, First American was guilty of all three complaints. The jury awarded the Stevensons $50,000 in compensatory damages for their breach of contract claim, and another $1,000,000 in punitive damages as a penalty for First American’s decision to act in bad faith.
First American appealed to the circuit court to:
- Reduce the compensatory damages award
- Modify the jury’s “yes” answer to the bad faith question on the grounds of insufficient evidence
- Set aside the jury verdict and order a new trial on the grounds that the punitive damages award was excessive
The appellate court agreed to a reduction in compensatory damages, but denied First American’s other complaints. First American then appealed to the Supreme Court of Wisconsin, which shockingly found that the punitive damages award was excessive, and reversed the court of appeals’ decision entirely. The case was remanded so that the punitive damages award could be reduced to little more than a quarter of the original award.
Related Legal Terms and Issues
- Compensatory Damages – An award of money in compensation for actual economic loss, property damage, or injury, not including punitive damages.
- Lien – The right to keep property belonging to another person until the debt that is owed by that person is paid in full.
- Mortgage – A legal agreement by which a bank lends money, with interest, to a buyer so that the buyer can purchase a piece of property.
- Punitive Damages – Money awarded to the injured party above and beyond their actual damages, for the purpose of punishing the wrongdoer for outrageous misconduct in a civil matter.