Title Insurance, Homeowners Insurance and Home Warranties: What's the Difference?

WHAT KINDS OF INSURANCE DO HOMEOWNERS NEED?

BUYING A HOME IN CALIFORNIA?

HERE’S WHAT YOU NEED TO KNOW

For many buyers, identifying and securing the correct insurance is critical. This is true not only in the purchase process, but also as an ongoing responsibility of home ownership. Understanding the different coverages, when the are needed and what options are available can be challenging.

Here’s a quick overview from a real estate perspective of what you need to know as a buyer and some examples. For more specific information, contact an insurance agent who specializes in these policies.

TITLE INSURANCE

Title insurance is a type of insurance that protects homeowners from financial losses due to title defects or disputes.

Title insurance is typically required by mortgage lenders and covers issues such as liens, encumbrances and other title issues that may have existed before the homeowner purchased the property. Even if you are paying cash for your new home, it is highly advisable that you secure title insurance. Not only will it protect you - it will also make it easier when you sell the property.

Title insurance falls into two different categories in the allocation of costs section of the standard CA Residential Purchase Agreement used in most residential purchases.

OWNER’S TITLE INSURANCE: this assures the buyer that the seller is providing clean title and is typically paid for by the seller. Please note that the current standard purchase contract does allow for the buyer to pay for it if the box is checked.

BUYER’S LENDER TITLE INSURANCE:

Lenders require borrowers to purchase a lender’s title insurance policy before funding a loan.

The basic functionality parallels the owner’s policy in intent: protect the lender against potential losses in the event that the seller is not legally able to transfer title rights. The lender is covered up to the loan amount.

Here’s how the two are different. If there is a claim and you aren’t personally insured, a lender’s policy won’t protect you. That’s what an owner’s title insurance does.

EXAMPLES

1) You buy a house from a married woman, who is the only person appearing on the deed, and are told that the husband has no interest in the property. Five years later the husband challenges the transfer stating that in CA that house was community property.

2) You buy a home for cash which doesn’t require a lender’s title insurance policy. Because it was a competitive multiple offer situation, the seller refuses to pay for the Owner’s title policy and you don’t buy one. Three years later, the son of the seller (who has now passed away) shows up with a deed stating that the father passed the house to him before he died.

HOMEOWNER’S INSURANCE

Homeowner's Insurance is a type of insurance that protects homeowners from financial losses due to natural disasters, fire, theft and other covered events. This type of insurance typically covers the cost of repairing or rebuilding the home and personal property.

It also provides liability coverage in case someone is injured on the property from a fall or other accident.

Homeowner's insurance policies vary widely in terms of coverage and cost, so it's important for to carefully review what you need and how much coverage is appropriate in your situation.

WHAT’S THE DIFFERENCE BETWEEN HOMEOWNER’S INSURANCE AND FIRE INSURANCE?

Homeowners insurance covers your home and belongings against multiple types types of hazards such as fire, smoke, theft, vandalism, wind, hail, tornadoes, and more.

Fire insurance is a standalone policy that protects your home and belongings solely against fire and smoke damage.

Even with the best homeowner’s policy, you might need or want additional coverage such as earthquake insurance or flood insurance.

EXAMPLES

1) You are away on vacation and your house is vandalized. You only have fire insurance so there is no coverage.

2) The large tree in your front yard falls on your house and damages it. You have homeowner’s insurance and can make a claim.

OTHER INSURANCE HOMEOWNERS MAY NEED OR WANT

FLOOD INSURANCE

If you live in a flood zone you may be required by your lender to purchase flood insurance.

The National Flood Insurance Program (NFIP) is managed by the FEMA and is delivered to the public by a network of more than 50 insurance companies and the NFIP Direct.

Just remember that floods can happen anywhere and that even one inch of floodwater can cause over $20,000 in damage.

Most homeowners insurance does not cover flood damage. Flood insurance is a separate policy that can cover your, the contents in your home, or both.

EARTHQUAKE INSURANCE

Earthquake insurance covers damage caused by an earthquake and insures “pure loss.” That means the value of the items lost. You are reimbursed for that specific amount which may be different for different people.

The California Earthquake Authority (CEA) provides most earthquake insurance in California.

CEA offers earthquake policies, for homeowners, mobile home owners, condo unit owners and renters. You cannot buy earthquake insurance directly from CEA. You purchase it directly from insurance companies that are members of CEA.

HO6 INSURANCE

An HO6 insurance policy is homeowners insurance for those who own a condominium or townhome. As a unit owner, you are likely responsible for damages to your unit.

HO6 insurance is often referred to as “walls in” insurance and often required by lenders depending on what is in the master policy.

EXAMPLES

1) You own a 2 level condo or townhome. You let your bathtub on the second floor overflow and it leaks down to the first floor and does damage. You have HO6 insurance and can file a claim.

2) The water line going from the wall to your refrigerator breaks causing damage to your wood floors. You don’t have HO6 insurance and can not make a claim.

Please note - when buying a condo or townhome, the association will already have a master policy. That is not something you as an individual have to shop for.

HOME WARRANTIES

The Home warranty is a basically service contract that provides coverage for the repair or replacement of certain home systems and appliances, such as HVAC systems, plumbing and electrical systems.

This type of insurance supplements homeowner's insurance and covers repairs or replacement of certain covered items. There are limits to what home warranties might cover.

IS ALL THIS INSURANCE REALLY NECESSARY?

In a word, yes.

Title Insurance, Homeowner's Insurance and a Home Warranty all serve different purposes and provide different types of coverage.

• Title Insurance is required by most mortgage lenders.

• Homeowner's Insurance is also usually a lender requirement.

• Home Warranties are optional.

Title insurance is a one time charge and as noted above, typically the seller pays for the more expensive Owner’s Policy.

Homeowner’s insurance is paid annually as are Home Warranties. Typically in most residential resales the seller pays for the first year of the home warranty.

In conclusion, Title Insurance, Homeowner's Insurance, and a Home Warranty are all important types of coverage that can help protect homeowners in California from financial losses. It's important for homeowners to carefully review their options and select policies that meet their needs.