Yes. Not to put too fine a point on it.
A typical real estate transaction involves two transfers: a deed from seller to buyer and a deed to secure debt, also called a “security deed,” from the buyer to its lender. By signing and delivering the deed, the seller conveys to the buyer, and makes certain promises (or “warranties”) regarding, title to the property. By signing and delivering the security deed, the buyer, as borrower, conveys the property to the lender to secure the loan, subject to the lender’s obligation to cancel the security deed upon full payment. A security deed also contains warranties by the borrower to the lender regarding the title to the property.
DIGRESSION: Before the rise of execution and delivery of written deeds to convey title to real property, the transfer generally occurred by the parties’ going within sight of the land and the seller’s declaring to the buyer, before witnesses, the granting of possession. The buyer then perfected his “seisin” by taking possession. In time the requirement of taking possession morphed into a ceremony, “delivery of seisin,” in which the seller handed to the buyer something from the land, such as soil, turf or a twig. The requirement of the transaction’s occurring within sight of the land also withered with time.
A general warranty deed is the customary type of deed in a residential transaction; a limited warranty deed (“special warranty deed” in some states) in a commercial deal. The seller (or “grantor”) delivering a general warranty deed warrants to the buyer (or “grantee”) that the seller has the right to sell the property, that no one will disturb the grantee’s “quiet enjoyment” of possession of the land and that the title is free of undisclosed encumbrances. A limited warranty limits the grantor’s responsibility for interference with possession and existence of encumbrances to those violations and encumbrances resulting “by, through or under” the grantor: matters caused by the acts or omissions of the grantor or others somehow claiming through the grantor, such as a tenant or lender. A security deed routinely includes the general warranties, with the grantor in that case being the borrower.
A grantee may have a claim against a grantor for breach of these warranties. For example, upon the buyer’s losing the property, and the lender’s losing its security, due to foreclosure of an undisclosed security deed, the lender will have a claim for breach of warranty against the buyer/borrower under the security deed and the buyer/borrower will have a breach of warranty claim against the seller. These claims may be worthless, however, if the obligors may are insolvent or in any event unable to pay. The parties must also assert the claims within legally-specified time periods.
In walks the title insurance industry. The lender will routinely require a title insurance policy. By delivering a title insurance policy to the lender, the title insurance company agrees to compensate the lender for damages caused by, among other things, undisclosed encumbrances such as a prior, undisclosed security deed. The lender has the benefit of the (at least presumed) solvency of the title insurance company and the absence of the time limits that apply to breach of warranty claims.
One option of the title insurance company is simply to pay off the prior security deed. By doing so, the title insurance company buys, or is “subrogated to,” the lender’s claim against the borrower for breach of the warranties in the security deed. The title insurance company then has the right to sue the borrower to recover the amount it paid to satisfy the security deed. The borrower can avoid this risk by purchasing an owner’s title insurance policy. The best and recommended practice is for the insured amount of the owner’s policy to equal the purchase price, but some buyers elect to obtain coverage only up to the amount of the loan to protect against a possible subrogation claim. Owner’s title insurance in either amount will protect the buyer/borrower against a warranty subrogation claim by the title insurance company, but an owner’s policy in the amount of the loan will not protect the owner’s full investment in the property.
A buyer should also obtain title insurance absent a lender. Again, the continuing solvency of the title insurance company will likely be more dependable than that of the seller. Upon subsequent sale of the property, the coverage of the title insurance policy will continue to the extent of the selling owner’s liability for breach of its warranties in the sale deed.