Encumbrance

Definition - What does Encumbrance mean?

An encumbrance refers to anything that affects, limits, interrupts, or obstructs an insurance policy and its provisions. For instance, encumbrances could include previous or outstanding claims for which the insurance company has already set aside funds. However, the insurance company might issue restrictions to the policyholder, restricting the use of these funds for other purposes.

In the context of insurance, encumbrances refer to claims to a property that is under the care, custody and control of another individual. A worker’s lien is an example of an encumbrance. This situation typically occurs when the owner of a property does not pay a worker for the labor provided. For instance, if a carpenter does some woodwork in a house and does not receive payment for it, the carpenter can seek an encumbrance on the owner’s property.

Insuranceopedia explains Encumbrance

In the United Sates, title insurance is a form of indemnity insurance. It provides coverage in the event of financial loss arising from defects in title to real property. It also provides coverage in situations where mortgage loans are invalid or unenforceable.

An alleged comparative deficiency of land records has enhanced the popularity of title insurance. These insurance policies protect an owner's or lender’s financial interest in real property against loss arising from:

  • Liens
  • Title defects
  • Other similar matters

Title insurance policies insure fee simple ownerships and mortgages. Some people purchase title insurance to insure other interests in real property such as easements, leases, or life estates. These policies defend against lawsuits attacking the title and provide reimbursements to the policyholder for the actual monetary loss incurred.

Encumbrances usually affect the transferability of the property and restrict its free use until the removal of the encumbrance. This is why title insurance is quite popular in the real estate sector especially.

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