Final answer:
The correct answer to this question is D. encumbrance to which the policy has not taken an exception.
A title insurance policy protects a buyer from financial losses caused by a previously undisclosed encumbrance that the policy has not expressly excluded, so the correct answer is D. encumbrance to which the policy has not taken an exception.
Step-by-step explanation:
A title insurance policy will protect a buyer from financial losses caused by defects in title not specifically excluded in the policy. The correct answer to this question is D. encumbrance to which the policy has not taken an exception. Title insurance typically covers financial loss from risks and defects that are already existing in the title, such as fraudulent title claims, unrecorded easements, and other such issues not expressly excepted by the policy. So, if the policy has not taken an exception to a particular encumbrance, the title insurance would provide cover if that undisclosed issue results in a financial loss to the property owner. This protection does not extend to circumstances where the policy has acknowledged an exception, such as recorded easements the policy excludes or external factors like changes in zoning regulations. Additionally, knowing about mechanisms such as escrow can also be beneficial as they can smooth financial transactions related to property ownership.