Title insurance is bought once at closing and covers no future event. It insures against problems that already exist in the record, which makes it a different product from the insurance households otherwise buy.
The risk is historical, not future
Ordinary policies cover events that might occur after purchase, and premiums are calculated against the probability of those events.
Title insurance covers defects in the chain of ownership that existed at closing and were not discovered, such as an undisclosed heir, a forged signature or an unreleased lien.
Because the risk already exists, the insurer's effort goes into finding problems beforehand rather than into pricing uncertainty about the future.
The search does most of the work
Before issuing a policy, a searcher examines recorded deeds, mortgages, judgments, easements and tax records covering the property's history.
Problems found are resolved before closing, through releases, corrective documents or by excluding the item from coverage.
The commitment issued in advance lists these exceptions, and reading it is how a buyer learns what the policy will not cover.
Two policies exist, covering different parties
A lender's policy protects the mortgage holder up to the loan balance and is required by nearly every lender.
An owner's policy protects the buyer's equity and is separate, usually optional, and purchased at closing for an additional premium.
A buyer who declines the owner's policy has paid for coverage that protects only the lender, a distinction that is often unclear at the closing table.
Coverage responds in two ways
If a covered claim arises, the insurer defends the title in court, which is often the larger practical benefit given the cost of litigation.
If the defect cannot be cured, the policy pays the loss up to the policy amount, subject to its terms and exceptions.
Claims are infrequent relative to premiums, which reflects the effort spent on searching rather than an absence of risk.
Practice varies by state
Who pays for which policy is set by local custom and negotiation, and it differs between and even within states.
Some states regulate premiums closely while others permit competition, and reissue rates may apply where a property was recently insured.
Buyers with questions about a specific commitment should raise them with a real estate attorney or the title agent before closing, since exceptions cannot be added afterward.