Hawaii Pre-Licensing National Practice Exam

A title insurance policy will protect a buyer from financial losses that are caused by:

1. Accidental property damage

2. An encumbrance to which the policy has not taken an exception

3. Natural disasters affecting the property

4. Acts of vandalism on the property

The correct answer is: An encumbrance to which the policy has not taken an exception

A title insurance policy is specifically designed to protect property buyers and lenders from financial losses associated with defects in the title or issues that could affect ownership rights. When considering the correct choice, it's essential to understand that title insurance covers risks related to the legal status of a property rather than physical damage or disasters. The correct choice emphasizes that the policy will protect against any encumbrances or claims against the property that are not excluded in the policy exceptions. For instance, if an earlier mortgage or lien not disclosed during the closing process is later discovered, and it leads to a financial loss for the buyer, the title insurance would cover that loss. This emphasis on undisclosed encumbrances is a key reason why title insurance is vital in real estate transactions, as it assures buyers that they hold clear title to the property. The other options, while they may relate to property risks in general, do not align with the scope of title insurance. Accidental property damage and acts of vandalism pertain to physical damage to the property, which is typically covered by homeowners' insurance rather than title insurance. Meanwhile, natural disasters, such as floods or earthquakes, fall under separate insurance policies designed for such events, not title insurance. Thus, the correct choice directly reflects the unique