What is title insurance?

What the heck is it?

A History…
Up until the mid-1800’s transferring a title to real estate, such as a home, was conduced by conveyancers. They were responsible for all aspects of the transaction. The conducted a title search to make sure the seller did indeed own the property and what rights, liens, or encumbrances existed with the property. The conveyancer then signed a brief description of the title.

As with many things in the United States, title insurance was the direct result of a lawsuit.

In 1868, Watson filed a lawsuit against Muirhead, the conveyancer. Muirhead had researched the title to the property and wrote the summary of the title (called an abstract) for Watson. After consulting with an attorney and acting in good faith, Muirhead did not include some items on the abstract. He reported the title as good without any encumbrances.

As the title was good, Watson proceeded with the purchase of the property. After the purchase of the property, Watson was presented with bills that were liens against the property. As liens travel with the title, he was required to pay them. Needless to say he sued.

The case went to the Pennsylvannia Supreme Court who dismissed the case saying their was no negligence on the part of the conveyancer. Watson had no recourse and was out his money.

As a result of this lawsuit, the first title company was founded in Philadelphia in 1876.

What is Title Insurance?
Title insurance is exactly that..an insurance policy that the title, up to the time of closing, is a clean title as reported. As with Mr. Watson, buyers of homes are counting on the fact that the title is marketable.

Today’s title insurance policies protect you against loss or damage due to

• Title is vested in another way.
• Any unknown defects, liens, or encumbrances on the property
• Unmarketable title
• Lack of access

These terms don’t make a lot of sense to most people so here are some examples of when it pays to have title insurance.

1. A family is split apart my chronic arguing and the daughter “disowns” her mother and father and doesn’t speak to them. After the death of her parents, they find a will leaving the family house to the daughter. They are unable to find the daughter, and the mother’s sister puts the home on the market and sells it FSBO. The sister forges a document in order to sell the home. A home buyer purchases the home unaware that their is a “lost heir” out there. Six months later, the daughter shows up to claim her inheritance: the buyer’s home.
2. A homeowner remodels their kitchen and does some updating in order to sell the home. The homeowner doesn’t pay the contractors and stalls them with “I’ll pay you out of the money I get from the sale.” They place the home on the market and get a cash deal quickly which closes in two weeks. The homeowner does not pay the contractors who place a lien on the home for work done for the homeowner.

Typically when there is a title problem it is due to fraud, forgery, deceipt…essentially people not acting like good human beings. Title insurance is one of those things that feels like a waste of money, up until you are that buyer that is thankful that the policy saved you thousands of dollars.