Anyone who has purchased property has probably heard of title insurance. But many may be operating under a misconception of how it works.
Earlier this year, the Arizona Court of Appeals issued an opinion clarifying some of these issues. In Centennial Development Group, LLC v. Lawyer's Title Insurance Corporation, the court explained that before a title insurance company issues a policy, it first reviews public records for any defects or encumbrances affecting the property (such as liens or easements). The company then issues a "title commitment" that lists the defects and encumbrances it found. When the company issues the title insurance policy, it attaches this list, called a list of "exceptions."
The list of exceptions is a common source of confusion. In some states, a title insurer can be sued for negligently failing to discover and disclose additional defects. That was the law in Arizona until 1992, when the Legislature amended statute to effectively bar negligence claims against title companies for failure to identify a cloud on title.