Title Insurance is a form of indemnity insurance predominantly found in the United States which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of an alleged comparative deficiency of the U.S. land records laws. It is meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853. The vast majority of title insurance policies are written on land within the United States.
Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate.
There are two types of policies - owner and loan. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance [a loan policy] to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance. Buyers purchasing properties for cash or with a mortgage lender often want title insurance [an owner policy] as well. A loan policy provides no coverage or benefit for the buyer/owner and so the decision to purchase an owner policy is independent of the lender's decision to require a loan policy.
Title insurance is available in many other countries, such as Canada, Australia, the United Kingdom, Mexico, New Zealand, Japan, China, Korea and throughout Europe. However, while a substantial number of properties located in these countries are insured by U.S. title insurers, they do not constitute a significant share of the real estate transactions in those countries. They also do not constitute a large share of U.S. title insurers' revenues. In many cases these are properties to be used for commercial purposes by U.S. companies doing business abroad, or properties financed by U.S lenders. The U.S. companies involved buy title insurance to obtain the security of a U.S. insurer backing up the evidence of title that they receive from the other country's land registration system, and payment of legal defense costs if the title is challenged.
History
Prior to the invention of title insurance, buyers in real estate transactions bore sole responsibility for ensuring the validity of the land title held by the seller. If the title were later deemed invalid or found to be fraudulent, the buyer lost his investment.In 1868, the case of Watson v. Muirhead was heard by the Pennsylvania Supreme Court. Plaintiff Watson had lost his investment in a real estate transaction as the result of a prior lien on the property. Defendant Muirhead, the conveyancer, had discovered the lien prior to the sale but told Watson the title was clear after his lawyer had (erroneously) determined that the lien was not valid.
The courts ruled that Muirhead (and others in similar situations) was not liable for mistakes based on professional opinions. As a result, in 1874, the Pennsylvania legislature passed an act allowing for the incorporation of title insurance companies.
Joshua Morris, a conveyancer in Philadelphia, and several colleagues met on 28 March 1876 to incorporate the first title insurance company. The new firm, Real Estate Title Insurance Company of Philadelphia, would "insure the purchasers of real estate and mortgages against losses from defective titles, liens and encumbrances," and that "through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore."
Morris' aunt purchased the first policy, valued at $1,500, to cover a home on North 43rd Street in Philadelphia.
Reason for existence
Title insurance exists in the U.S. in great part because of the way U.S. land records laws are structured. Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government makes the determination of title ownership and encumbrances on the title based on the registration of the instruments transferring or otherwise affecting the title in the applicable government office. With only a few exceptions, the government's determination is conclusive. Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property. The Torrens Title system is the basis for land registration systems in many countries.A few jurisdictions in the United States have adopted a form of this system, e.g., Minneapolis, Minnesota and Massachusetts. However, for the most part, the states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid.
Greatly simplified, in the recording system, each time a land title transaction takes place, the parties record the transfer instrument with a local government recorder located in the jurisdiction (usually the county) where the land lies. The government indexes the instrument by the names of the grantor (transferor) and the grantee (transferee) and photographs it so any member of the public can find and examine it. In general, if the transferor then purports to transfer the property to someone else who does not know he already transferred it to someone else, and the first transfer was not recorded, that transfer is void with respect to the second transferee and the second transferee owns the land.
Under this system, to determine who has title, one must:
- Examine the indexes in the recorders' offices, pursuant to various rules established by state legislatures and courts
- Scrutinize the recorded instruments
- Determine how they affect the title under applicable law. The final arbiters of title matters are the courts, which make decisions in suits brought by disagreeing parties. Initially, the person who wanted to understand the title would hire an abstractor to search for the documents affecting title to the land in question, and an attorney to opine on their meaning under the law; this is still normal in some places. However, in most of the U.S., people have found this procedure cumbersome and inefficient. If the abstractor or attorney makes a substantial error, he compensates his client only to the limit of his financial responsibility (including his liability insurance). Furthermore, if the error was not due to his negligence, the abstractor or attorney may not compensate the client at all. The opinions given by attorneys as to each title are not uniform, so the client must spend time analyzing each one and has a risk of misunderstanding it.
Advocates of this system of property recording argue that a property system which is inherently contingent provides a stronger guarantee of private property rights over the long run than a registration system which provides assurance of one's rights to private property.
Description above from the Wikipedia article Title insurance,More
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