Encumbrance
What Does Encumbrance Mean?
An encumbrance refers to anything that affects, limits, interrupts, or obstructs an insurance policy and its provisions. For example, encumbrances may include previous or outstanding claims for which the insurance company has already set aside funds, with the insurer potentially issuing restrictions on the use of these funds for other purposes.
In insurance terms, encumbrances also refer to claims against property that are under the care, custody, or control of another individual. A worker’s lien is an example of an encumbrance. This occurs when a property owner fails to pay for the labor provided. For instance, if a carpenter performs woodwork in a house but is not paid, the carpenter can place an encumbrance on the owner’s property.
Insuranceopedia Explains Encumbrance
In the United States, title insurance is a form of indemnity insurance that provides coverage in the event of financial loss due to defects in the title to real property. It also covers situations where mortgage loans are found to be invalid or unenforceable.
The growing concern over comparative deficiencies in land records has contributed to the increased popularity of title insurance. These policies protect an owner’s or lender’s financial interest in real property against losses resulting from:
- Liens
- Title defects
- Other similar issues
Title insurance policies typically cover fee simple ownerships and mortgages, but some individuals also purchase title insurance to cover other interests in real property, such as easements, leases, or life estates. These policies defend against lawsuits that challenge the title and reimburse the policyholder for actual monetary losses incurred. Buyers who are first-time home buyers shopping for home insurance often run into encumbrance issues during the closing process, which is why a title search is usually paired with a hazard policy before a lender will fund a mortgage.
Encumbrances often impact the transferability of property and restrict its free use until the encumbrance is removed. This is why title insurance is particularly popular in the real estate sector. Once a clear title is established, most owners then compare quotes from the best homeowners insurance companies to protect the property itself against fire, theft, and liability claims.