Title insurance is used to protect the transferee from title claims to the property. In the past, many deeds and transfers were not properly recorded which meant there was no record of the transfer of ownership being legitimately executed. Ultimately, this translated into compromised title issues that had negative financial implication to mortgage lenders and purchasers.
Unpaid property taxes or other encumbrances resulted in a lien being placed on the property in question which prevented the prospective owner from obtaining a clear title. Municipal fees that were assessed and unpaid would also result in a lien.
Subsequent sales would be compromised and result in substantial financial loss not discovered before the sale of the property. The legal remedy and legitimate protection for the lender is title insurance which affords the lender protection from any claims to the title before the sale of the property is finalized.
History of Title Insurance
Real Estate Title Insurance Company was the first recognized real estate title insurance company in the United States. Joshua Morris and several associates, on March 28, 1876, incorporated with the purpose of insuring real estate purchasers from losses. The first title policy issued had a face value of $1,500 on a home located on North 43rd Street in Philadelphia.
Before title insurance, the validity of title documents was based on blind faith, as registry records were often inaccurate; legitimacy of titles could be readily challenged. If the deed or title was in fact imperfect and the challenger favorably impressed the presiding jurist, the purchaser forfeited his purchase amount without recourse.
For example, Watson vs Muirhead, was adjudicated by the Pennsylvania Supreme Court. Muirhead, the transferee lost, although the seller, Watson, had unintentionally provided inaccurate information regarding the property based on the advice of his attorney. The ruling further cleared Watson of responsibility for the erroneous information.
Title Insurance Policies
For both real estate owners and lenders, there are standardized policies available. However, there is a construction document included with the real estate purchaser’s policy. This instrument is the exception rather than the rule. The policy may be purchased by the owner or buyer per agreement. There are provisions in the event that the title is “unmarketable” in the policy that covers damages or financial losses incurred for same.
This document contains an assertion that proposed real estate is free of defects in the title. If there are inconsistencies, these are contained is the section entitled “exceptions” and are exempt from the insurance policy’s inclusions. The policy clears up any problem with access to the real estate.
The face amount of the policy, the amount of liability, is customarily the purchase price of the real estate. In residential polices, there may be extraneous coverage from title encumbrances and supplementary provisional areas regarding losses because of title irregularities.
Why Is Title Insurance Important or Necessary?
Many land transactions were not recorded despite statutes and laws enacted in reference to required registration of titles and claim to land ownership. Additionally, liens against the property were to be recorded against the title in the event of an intended sale before the inception of title insurance and legitimate title searches. The registrar was to be duly recorded and properly indexed by the name of the seller or granter and the buyer that is the grantee, and recorded for posterity with a photograph.
Previously, an abstracter researched the title to insure that it was clear of all claims and liens and submitted it for attorney review. This resulted in many errors and was deemed ineffectual as defects in that information would cause the lender a sufficient loss.
The title policy ensures that the lender is compensated for the purchase price of the real estate or property. However, this protection is valid only through the date the property is officially sold and the title conveyed to the new owner.
Title insurance protects purchasers from unresolved liens and claims to the real estate purchase and unequivocally establishes that the title to the property is clear.