Does Title Insurance Work? A Deep Dive for Orange County Homebuyers

What Is Title Insurance?

Title insurance is a specialized insurance policy that protects owners and lenders against problems with a property’s title – essentially, legal ownership. When you buy a home, the title company researches public records to make sure no one else has a claim to or lien on the property. However, mistakes and overlooked issues can happen. Title insurance provides financial protection if a covered issue arises later, such as an unknown lien, an heir claiming rights to the property, or a paperwork error from years ago. The California Department of Insurance defines title insurance as a “contractual obligation” that guards against losses from defects in title that may exist at the time you purchase the property. In other words, it ensures your home really becomes your home without surprise claims down the line.

Why Do You Need Title Insurance?

For most people, a home is the most expensive purchase they'll ever make, so it's critical to make sure that investment is protected. Title insurance is used in nearly every real estate transaction because it offers peace of mind that the property has a clean history. Importantly, most mortgage lenders require a title insurance policy as a condition of the loan – they want to be confident their lien is first in line against the property.

But even if you're buying with cash, going without title insurance is a gamble. Title issues can and do occur more often than you'd expect: title companies report that roughly 1 in 3 real estate deals encounters a title problem that needs resolving before closing. Common issues include old liens, boundary disputes, or public record errors. Without title insurance, any such issue discovered after you take ownership could become your (expensive) problem to fix through courts or settlements. Title insurance ensures that if something does slip through the cracks, you're not left holding the bag financially.

How Does Title Insurance Protect Homeowners?

Unlike other insurance that you pay for annually, title insurance involves a one-time premium paid at closing, and its protection lasts as long as you own the property. If a covered title defect emerges – say, a contractor shows up claiming a previous owner never paid them and a mechanic's lien was missed in the records – your title insurer will step in. A title policy typically covers the legal costs to defend your ownership and will pay to resolve valid claims, up to the policy amount. For example, if an old lien or hidden easement (right of way) is discovered after you close, the insurance can finance the clearing of that lien or compensate you for loss in property value. This protection gives homeowners the confidence that they won't be on their own if a past issue comes knocking.

Title insurance has real, tangible benefits. In fact, a lot of its value comes from problems avoided: the extensive title search and curative work done before you close. Many title issues are quietly resolved by the title company behind the scenes during escrow – you'll never even know, except perhaps seeing a note on your preliminary title report that a lien or defect was identified and addressed. When an issue does come up after closing, having title insurance can turn a potential nightmare into a manageable situation. Without it, homeowners would have to pay for lawyers and potentially settle claims or even risk losing the property.

Lender’s Policy vs. Owner’s Policy: What’s the Difference?

There are two main types of title insurance in a home sale, and it's important to understand both. The lender’s policy (also called a loan policy) protects the lender’s interests. If you take out a mortgage, your bank will require this policy to safeguard the amount they lent you. A lender’s title policy covers the lender up to the loan balance, and it ensures the lender can recover their investment or foreclose without unexpected title disputes blocking them. However, it does not protect you as the homeowner. That’s where the owner’s policy comes in. An owner’s title insurance policy is optional but highly recommended – it protects your equity (usually up to the purchase price of the home) and covers you if someone challenges your ownership or if undisclosed issues surface later. Unlike the lender’s policy which lasts only for the duration of your loan, an owner’s policy remains in effect for as long as you own the property.

• Lender’s Policy: Required by lenders, covers the lender’s stake (loan amount) only, and expires once the loan is paid off.
• Owner’s Policy: Optional for buyers but crucial for full protection, covers the homeowner’s interest (purchase price) and stays in force as long as you own the home.

Fortunately, when you purchase both policies at the same time during escrow, the title company often issues them together at a discounted “simultaneous issue” rate. In Southern California, the seller customarily pays the premium for the buyer’s owner’s title policy, while the buyer pays for the lender’s policy – though this allocation can be negotiated. Always review with your agent who is covering which title insurance fees in your contract.

Real-World Cases: Title Insurance in Action

Does title insurance really work in practice? Most of the time, yes – and it has saved many homeowners from dire straits. For instance, imagine discovering after closing that a previous owner’s heir or ex-spouse claims they still own an interest in your house. Without title insurance, you would have to defend your ownership in court at your own expense. With title insurance, the insurer handles the legal defense and pays out any settlement or loss if the claim proves valid. There have been cases in California where title insurers paid tens of thousands of dollars to resolve surprise liens or ownership disputes, allowing the new owners to keep their homes.

However, title insurance isn't foolproof or unlimited. A notable recent example was a case in California where a family purchased a property only to later find an undisclosed maintenance easement that severely limited their plans to expand the home. The title insurance company acknowledged the mistake and offered compensation based on the estimated loss in value – but the owners felt the payout fell far short. They ended up in a legal battle with the insurer over the true impact on their property’s value. This case highlights that while title insurance will generally compensate you for losses due to covered defects, there can be disputes about how much the compensation should be. The good news is such scenarios are relatively rare. In Orange County, the vast majority of transactions close with clear title, or any title hiccups are handled without drama through the insurance and escrow process. And as our anecdote above illustrated, when an issue does arise, having the backing of a title company can make all the difference.

What Title Insurance Doesn’t Cover

While title insurance is a crucial safeguard, it’s equally important to know its limitations. These policies have specific exclusions – things they generally will not cover. Key exceptions include:

• Problems you cause or agree to: Any liens, loans, or legal issues you create after you purchase the home (for example, if you take out a second mortgage or incur a tax lien, that’s not covered by your policy).
• Known issues listed in the policy: Title policies exclude any defects or encumbrances that were discovered before closing and listed as exceptions in your preliminary title report. In other words, if the title report told you about an existing easement or restriction, you can’t later claim it as a surprise – it’s excluded from coverage.
• Zoning, permit, or code issues: Title insurance doesn’t guarantee that the property complies with local zoning or building codes. For instance, if you find out after closing that an addition was built without a permit or violates a zoning rule, that’s not something title insurance addresses.
• Physical property problems: Issues like survey inaccuracies or encroachments (a neighbor’s fence built over the line) may not be covered under a standard policy unless you have a specific endorsement or an enhanced policy that includes such matters. Title insurance deals with legal ownership and recorded documents, not the physical condition of the property.
• Events after closing: Critically, title insurance covers claims stemming from the past (prior to or at the time of purchase). It generally won’t cover acts that occur after you take ownership. For example, if someone fraudulently files a deed after you bought the home pretending to be you or a previous owner, that new fraudulent deed might not be covered by your standard policy.

Homeowners should carefully read the title policy’s list of exclusions and the schedule of exceptions. This is where any known issues are called out. If you see something in there that you don’t understand – an easement, a covenant, a weird legal description – ask your escrow officer or real estate agent to explain it. Title insurance won’t cover any matter that was of record and disclosed to you, so you need to be comfortable with those items before proceeding to closing.

California Regulations and Local Practices

Title insurance in California has some nuances that buyers and sellers should know. First, the industry is regulated by the California Department of Insurance, which sets standards for rates and practices. Every title insurer (and title agent) in the state must file its rate schedules with the Insurance Commissioner, and these filings are public. Since each company’s costs differ, rates can vary, so you can save money by comparing providers. California also licenses and oversees the escrow companies that handle your closing, which work hand-in-hand with the title insurer to issue your policy at the close of escrow.

In terms of local custom, as mentioned earlier, in Southern California (including Orange County) it’s common for the seller to pay for the buyer’s owner’s title insurance policy, while the buyer pays the lender’s policy premium. This is not mandated by law – it’s just tradition and can always be negotiated in the purchase agreement. The logic is that providing clear title (and the insurance to back it up) is part of delivering the home to the buyer. In Northern California, by contrast, buyers more often pay for their own owner’s policy. Always check what’s standard in your county and, most importantly, what your specific contract says.

Another California point: you have the right to choose the title company (and escrow provider) that will handle your transaction. Federal law under the Real Estate Settlement Procedures Act (RESPA) prohibits a home seller from requiring you to use a particular title insurer as a condition of sale. In practice, many buyers go along with the title company selected by the seller or their agent (especially if the seller is covering the cost), and that’s usually fine. But if you have a preferred title company or find a better rate, you are free to propose them – just do so early to avoid delaying escrow.

Finally, be aware that title insurance in California comes in different forms. The standard coverage policy (often the CLTA standard policy) covers risks like recorded liens, claims, or errors in public record. There is also an extended coverage (ALTA Homeowner’s) policy that provides broader protection, including certain off-record risks such as some types of forgery, building permit violations, or encroachments, often with coverage that increases if your property value rises. The enhanced policies cost more and may require a survey or inspection. Most residential buyers get the standard policy by default, but if you have special concerns, talk to your escrow officer about whether an upgraded policy or specific endorsements make sense for you.

When Should You Seek Additional Legal Review?

For most straightforward home purchases, the title and escrow process will quietly do its job in the background. But there are times when a buyer (or even a seller) might want a real estate attorney to take a closer look, even with title insurance in the mix. Consider getting an extra legal review in scenarios such as:

• You see something confusing or concerning in the preliminary title report. If, for example, there’s mention of an easement running across the property or an old lien that hasn’t been released, an attorney can explain the implications or push the title company to clarify how it will be handled.
• The property is being purchased out of a foreclosure, probate sale, or estate sale. These situations have a higher chance of title tangles (like undisclosed heirs or liens from creditors). A lawyer can ensure all extra steps are taken to clear title properly, and advise you on any risks that title insurance might not fully cover.
• You plan to significantly alter or develop the property after purchase (e.g. splitting a lot, adding a second story, or building an ADU) and want to be sure no title restrictions will interfere. An attorney can check for any deed restrictions or covenants that aren’t obvious at first glance.
• The deal is especially high-value or complex – for instance, buying a multi-million dollar home or an investment property with partners. In such cases, spending a bit extra on legal counsel to double-check title and escrow documents can be worth the peace of mind.

Remember, the title insurance company’s job is primarily to ensure the title is insurable (marketable) – which usually aligns with your interests as a buyer. But their focus is on past ownership issues. They are not your personal legal advisor for future plans or unrecorded matters. If you have questions or unusual circumstances that go beyond the scope of the title search, consulting a knowledgeable real estate attorney in California can fill that gap. In some instances, an attorney might even suggest obtaining certain title endorsements or negotiating a cure for an issue before closing, rather than relying solely on insurance after the fact.

Natalie Boyle
REALTOR®, Founder of Verso Homes (DRE #01329012)
Over 15 years helping South OC homeowners discover their perfect community.
Learn more about Natalie →