Title insurance is a form of indemnity insurance, predominantly found in the United States and Canada, that insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Unlike some land registration systems in countries outside the United States, US states' recorders of deeds generally do not guarantee indefeasible title to those recorded titles. For covered risks, title insurance must defend against a lawsuit attacking the title and/or reimburse the insured for the actual monetary loss incurred generally 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.D. B. Burke, Jr., Law of Title Insurance, Little Brown & Company (1986) § 1.1, p. 2. 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 general types of policies – owner and lender. Just as lenders require fire insurance and other types of insurance coverage to protect their loan, nearly all institutional lenders also require title insurance 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. Nearly all buyers purchasing properties want title insurance as well.
A loan policy provides no coverage for the buyer/owner. For the buyer to obtain coverage, they must purchase an owner policy; it's independent of the lender's requirement, though commonly purchased together at a discounted simultaneous-issue rate.
Title insurance is available in many other countries, such as Canada, Australia, the United Kingdom, Mexico, New Zealand, Japan, China, South 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 March 28, 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.National Title-Duluth, Inc. TITLE INSURANCE: AN AMERICAN TRADITION ". Accessed November 5, 2008.
Purpose There are two types of title systems used worldwide: Land registration and land recording.
Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government determines title ownership and encumbrances using its land registration; 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 several common law countries. Nineteen jurisdictions in the United States, such as Minnesota and Massachusetts, adopted a form of this system between 1896 and 1917, however it fell out of favor after a single judgement in Imperial County, California, bankrupted the state's title indemnification fund, and the vast majority of U.S. 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.
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. If such a transaction goes unrecorded for any reason or length of time, an unscrupulous grantor could sell the property to another grantee. In many states, the grantee whose transaction is recorded first becomes the legal owner, and any other would-be buyers are left without recourse.
The advantage of the recording system is: In a registration system, the cost and risk are borne by the general public, but in a recording system, cost and risk are borne by the users of the system. In a recording system, an independent authority reviews government land transfers. In a registration system government can decide registration disputes in its favor, preventing separation of powers and the constitutional right to due process of law. A recording system can provide for conveyance of land for situations beyond the capacity of public records, such as homesteading and inheritance. A recording system combined with title insurance decentralizes records, creating redundancy. For example, when many records were destroyed in San Francisco's 1906 earthquake, out-of-town title companies maintained records that allowed landowners to prove ownership of their property.
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. Historically, the person who wanted to understand the title would hire an abstractor to write a property abstract showing the chain of title. However, if the abstractor makes an error, the client may only be compensated if the attorney is negligent, subject to the limit of his financial responsibility (including his liability insurance).See Watson v. Muirhead 57 Pa. 161 (1868) where an attorney made a non-negligent error and was not required to compensate the purchaser of the property. Historians say this case was the impetus for title insurance in the U.S. See D.B. Burke, Jr., Law of Title Insurance, Little Brown & Company (1986) § 1.1, p. 2. However, the willingness of these professionals to accept strict liability varies.
Title insurers conduct a title search on public records before they agree to insure the purchaser or mortgagee of land. Specifically, after a real estate sales contract has been executed and escrow opened, a title professional will search the public records to look for any problems with the home's title. This search typically involves a review of land records going back many years. More than one-third of all title searches reveal a title problem that title professionals will insist on fixing before the transaction closes. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor (resulting in a mechanic's lien), or the previous owner may have failed to pay local or state taxes (resulting in a tax lien). Title professionals seek to resolve problems like these before the transaction closes, since otherwise, their employer, the title insurer, will be required to fix such title defects by paying such unpaid fees or taxes.
Title insurance policies are fairly uniform, and backed by statutory reserves, which is especially important in large commercial real estate transactions where the buyer and their lender have a large amount of money at stake. The insurer also pays for the defense of its insured in legal contests.
At least 20 U.S. states have experimented with Torrens title or other title registration systems at one time or another, but most have retreated to title recording under pressure from title insurers or from lack of interest. According to Karl Llewellyn, one Torrens title on one lot in New York City can render the entire block unavailable for large-scale improvement (i.e., skyscrapers); no lender will finance the purchase of such a lot because no New York title insurer will guarantee a Torrens title. The U.S. title insurance industry has successfully opposed land registration systems by saying that they are vulnerable to fraud (a severe problem in most land registration jurisdictions) and by contending that an inherently contingent property system more effectively protects property rights. Their contention is also that, while it is possible to fortify land registration systems to prevent the registration of forged deeds, the necessary countermeasures are complex and expensive. A 2007 book attacking the American title insurance "cartel" acknowledged that "[m]ore extensive use of Torrens certification would require setting up a special judicially supervised bureaucracy."
Types of policies Standardized forms of title insurance exist for owners and lenders. The lender's policies include a form specifically for construction loans, though this is rarely used today.
Owner's policy The owner's policy assures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable.A title is unmarketable if it would be unacceptable to a reasonable purchaser exercising reasonable business prudence, who is informed of the facts creating or affecting it and their legal meaning, because it appears subject to material defect, grave doubt or to the likelihood of litigation. However, the title need not be bad in fact to be "unmarketable." Black's Law Dictionary 4th Ed. West Publishing Co. 1951) defining "Marketable Title" and "Unmarketable Title." The policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverages, expanded forms of residential owner's policies exist that cover additional items of loss.Examples are the American Land Title Association Residential Owner's Policy and Expanded Coverage Residential Owner's Policy.