What exactly is title insurance?

Title insurance is, first and foremost, an insurance product. One pays a premium to a title insurance company for a policy that insures the person has good, marketable title to the property. Lawyers are still required to do some searches as specified by the title insurer, but not as many searches as are required when title insurance is not being used. The lawyer then reports to the title insurer regarding the state of title as required by the insurer and the insurer issues a policy covering the purchaser and the mortgage lender protecting them against loss of marketability as a result of title defects not excluded or excepted. Effectively the title insurer is betting that most of the time it will collect the premium and not be required to pay out any claims due to title defects. When title defects do occur, the policy owner, i.e. the purchaser, makes a claim to the insurer and the insurer either cuts a cheque to the purchaser to cover the loss that arose because of the title defect, or the insurer "fixes" the problem so that the purchaser can sell the property for full value.

Coverage under title insurance is limited to "title defects" and that term covers a large range of potential problems. For instance, an outstanding work order is a title defect which would be covered and so are outstanding taxes which form a lien on the property. A mortgage that has been fraudulently discharged through forgery is a title defect that would be covered.