A title insurance policy is an indemnification contract between a title company and an insured. The policy indemnifies the insured against loss or damage resulting from defects, liens and encumbrances affecting title to the land covered by the title insurance policy.
Title insurance is conceptually quite different from other forms of insurance (i.e., casualty insurance). While a casualty insurance policy guarantees payment to the insured, a title insurance policy only promises to indemnify the insured. The distinction lies in the amount of discretion given the insurer. If an insurance company must make payment for a loss, that company’s policy is a guarantee. However, if a company’s policy, by its terms, gives the insurer the option to pay or, instead, cure the defect which created the loss, then the policy is an indemnity agreement. Title insurance policies are the latter. Title insurance policies specify the risk a title company is willing to undertake; they do not opine as to a particular state of facts. Accordingly, a title insurance company may attempt to clear the title of a possible missing interest, instead of simply paying the insured or claimant a sum of cash. Similarly, the company may pursue litigation to free the insured premises of a lien or attachment, instead of paying the insured or claimant the amount of the lien. The insured cannot demand a payment if the title insurance company elects, under the terms of the policy, to cure the defect in title. In addition, to successfully assert a claim, the insured under an indemnity agreement such as a title policy must suffer an actual loss. The mere existence or discovery of a defect will not automatically result in a valid claim. The insured must be actually damaged, or the claim fails.
The modern system of title insurance first appeared in the late 1800s. It was an industry born of necessity as America experienced rapid expansion and great commercial growth. Prior to the creation of title insurance, transferring title to real property was handled primarily by conveyancers, who were responsible for all aspects of the transaction. The conveyancer conducted a title search to determine the ownership rights of the seller and any other rights, interests, liens or encumbrances that might exist with respect to the property, and, based on its search, provide a signed abstract of title. While conveyancers were experts on real property law, they generally were not lawyers. A mistake in the abstract seldom resulted in any recovery. If the conveyancer acted in good faith and used due care in preparing the certificate, then the resultant loss would fall on the landowner.
The practice of insuring title began after a Pennsylvania Supreme Court ruling in 1868. The case, Watson v. Muirhead, 57 Pa. 161 (1868), settled the matter of ownership over a property purchased after an “abstract of title,” or title search, was conducted. During his research, the transaction conveyancer (an abstractor) found a lien on the title, which he then turned over to an attorney for a legal opinion. The attorney advised that the judgment was not in fact a valid lien. With this assurance, the conveyancer and purchaser completed the transaction. Not long afterward, the property was sold at a Sherriff’s sale in order to pay off the lien, which was in fact lawful. The court ruled that the lien, and thus the Sherriff’s sale, was indeed lawful, and the conveyancer involved in the transaction was not held liable for misinformation because the legal standard was “negligence,” or failure to act with due care. Since the conveyancer had relied upon an attorney’s opinion that the lien was invalid, the conveyancer had use due care—even if he was incorrect.
The judgment, and subsequent loss to the purchaser, then prompted a group of Philadelphia conveyancers to establish a way to protect the innocent buyers of real property. In 1876, this group formed the first title insurance company, whose mission it was to protect “the purchasers of real estate and mortgages against losses from defective title, liens and encumbrances,” and added, “through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore.” Shortly thereafter, title insurance companies became established in other large metros throughout the United States, including New York City, Chicago, Minneapolis, San Francisco and Los Angeles.