Which statement about title insurance is true?

• A. Lenders require title insurance to insure lien priority
• B. Abstract is the same as title insurance
• C. Title insurance guarantees all title clearance
• D. Title insurance is optional and never required by lenders

Answer: (A)

Title insurance protects against losses from defects in the title that could affect ownership or the lender’s ability to enforce the loan. In a real estate transaction, lenders want assurance that their mortgage sits on a clear, priority lien—free from other claims that could later supersede or undermine their security. A title insurance policy (usually the lender’s policy) guarantees, up to the policy amount, that the title is valid and that the lender’s lien priority is protected, defending against covered title issues or compensating for losses if a covered problem arises. This protection is provided through a one-time premium paid at closing and continues for as long as the loan exists.

The statement that lenders require title insurance to insure lien priority is correct because securing first-priority lien is essential for the lender’s risk management. An abstract of title, by contrast, is simply a summarized history of the property's title and is not the insurance itself. It’s a related document, not a guarantee.

Title insurance does not guarantee that all title issues are cleared. It covers specific, enumerated defects and exceptions under the policy; there can be uninsured problems or gaps not covered by the policy. And while lenders typically require a lender’s title insurance policy, owner’s title insurance for the buyer is optional, though many buyers choose to purchase it for broader protection of their own equity.