If you haven't bought a home, or you haven't in a while, you may not have heard of titile insurance. There are two parts to it and it is usually only discussed at settlement.
To begin, let's break this down. When you buy a home you will get a deed, which documents the seller transferring their legal ownership of the house to you. That legal ownership is also called the title.
So what does title, or ownership, insurance cover? Title insurance pays for lawyers to defend the ownership of your house. There will be a title search done prior to settlement and the lawyer will find any problems (also called clouds) that are recorded. They cannot find problems that are not recorded. Should someone come forward and claim to have a rightful ownership in your house, the process will likely have to be settled in court and the lawyer fees could be be expensive.
Lender's title insurance is generally required when you buy a home. This protects the lender.
You are given the option of buying owner's title insurance. This is generally included in the amount you are asked to bring to closing. If you choose not to buy the policy, the amount will be refunded to you.
I have been told by a local real estate lawyer that the most important times to buy the policy is when the home was transferred by foreclosure or through a will.
Let me know if you have any questions.