Washington State Real Estate Practice Exam

What is the primary purpose of title insurance in a real estate transaction?

1. To facilitate the closing process

2. To protect against financial loss from defects in the title

3. To ensure compliance with local laws

4. To provide mortgage backing

The correct answer is: To protect against financial loss from defects in the title

The primary purpose of title insurance in a real estate transaction is to protect against financial loss from defects in the title. Title insurance serves as a safeguard for property owners and lenders against any issues that may arise due to unknown encumbrances, liens, or other defects that could affect ownership rights. This protection is crucial because, while many issues can be uncovered through a title search, not all potential problems can be identified prior to closing. For instance, a previously undiscovered lien or a claim from a forgotten heir could emerge after the transaction, posing risks to the buyer's ownership. The significance of title insurance is especially pronounced because it offers coverage for both past and future claims against the title, thus providing peace of mind to the insured parties. In the event a defect arises that was not discovered during the title search, the title insurer typically steps in to resolve the issue or compensate the insured for financial losses, which can be considerable. While facilitating the closing process, ensuring compliance with local laws, and providing mortgage backing are important aspects of real estate transactions, they do not capture the primary function of title insurance, which is specifically to mitigate risks related to title defects.