Final answer:
Title insurance protects parties with a financial stake in a property from financial losses due to defects in the title. It's important to note that it covers events that pre-date the insurance policy, such as unresolved liens or legal issues from previous owners.
Step-by-step explanation:
Title insurance is designed to protect parties with a financial stake in a property from losses associated with title defects. This can include previous liens, outstanding taxes, or legal issues with the property title that were unresolved before purchasing. A unique aspect of title insurance, unlike other insurance types that protect against future events, is that it covers events affecting the title that have already happened before the policy was issued. For example, if a previous owner had unresolved debts that resulted in a lien on the property, title insurance would protect the current owner from financial loss.
It's important to differentiate title insurance from other types of insurance. For instance, it does not cover issues such as damage to the property or theft, which is covered by homeowners insurance, nor does it protect a lender from borrower default, which is addressed by loan insurance. Moreover, title insurance differs from deposit insurance, a strategy enacted by Congress to prevent bank runs, allowing depositors to not lose their money if a bank goes bankrupt, as guaranteed by the Federal Deposit Insurance Corporation (FDIC) in the U.S.