This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
The actual protection afforded by the policy may be classified under two heads:
First - Where the title is good and marketable, and in the condition which the policy states; and
Second - Where it is not marketable and is not in the condition which the policy states.
In the first of these cases, where the title is marketable and in the condition stated in the policy, the only loss for which the insuring company will reimburse the assured is the cost of litigation to defend and enforce the title insured.
Incidental losses are not covered in this instance. A policy holder should understand this clearly. Take this instance: An assured desires to sell the property, title to which has been insured to him. He makes a contract; the purchaser declines to take the title, affirming that it is bad. The assured may be delayed in obtaining the purchase money and in enforcing the contract, and suffer loss of interest or other incidental losses, consequent on such delay, but, assuming that the title is ultimately held by the courts to be good, the policy gives no other protection than covering the cost of the litigation necessary to compel the purchaser to take the title.
In the second case, where the title is not in the condition which the policy states, the company will respond for loss of every sort, incidental or otherwise, resulting from defects in the title, but not exceeding the amount stated in the policy; so that, generally speaking, in the case of titles which are defective, but which a policy has insured as good, the policy holder is reimbursed for all his losses, up to the amount stated in the policy.
. How Policies Are Voided
All policies of title insurance require the utmost good faith on the part of the assured. They must notify the company, before applying for the insurance, of any questions affecting the title, of which they have notice, and their failure to do so may invalidate their policies.
After the policy has been issued, when a claim is made against the title insured, the policy holder must at once notify the company, in order that it may, at once, take such steps as it may deem wise to protect the assured and itself. It has also the absolute right to conduct any litigation with regard to the title, and the assured stipulates that his name may be used for this purpose, the company, of course, paying all charges of every sort incidental to such litigation.
The company also has the right, in case there is a defect in the title resulting in a loss paid to the assured, to avail itself of any covenant or warranty which the assured may have, giving him a claim against some other person, by reason of such defect. This is an important right which the assured is bound to preserve harmless to the company, and if he releases or impairs it, he may thereby invalidate his policy.
Title insurance companies cannot insure every risk that is offered to them. In this particular they resemble other insurance companies. They cannot risk their capital by the assumption of unusual and extra hazardous risks. It is their aim, and, of course, is greatly to their interest, to insure every title that is offered, and they are resourceful and ingenious in suggesting ways of curing defective titles and aiding owners to perfect their titles, so that they may be insured. A title once insured is a likely source of future profit to the company. Having once examined it, the company can continue its examination to a new purchaser at a minimum cost, and the fact that a title is insured makes it more desirable and easily transferable.
Title companies have added greatly to the negotiability of real estate, owing to the speed with which titles can be examined, through the instrumentality of the extensive plants and large forces of the companies. The long delays incident on the examination of titles by lawyers are, to a great extent, things of the past, and at no distant day, it is believed that the companies will have approximated the ideal toward which they are aiming - making a transfer of real estate with the same rapidity that transfers of stocks and bonds are now effected on the Stock Exchange.