Origins of Title Insurance
Not so long ago, before 1876, transfer of title in the United States was done without any form of insurance. Title searches, including searches for title ownership, liens or other interests, or any encumbrances were performed by conveyancers. Even though this profession didn't require them to have a legal degree or any special license or qualifications, they were considered authorities in matters of real estate law. Based on their research and findings conveyancers would produce an abstract, a term which until now is widely used to describe the report of correct status of title on a certain property.
Things changed after Watson vs. Muirhead of 1868, a case tried in the Pennsylvania Supreme Court. Earlier that year Watson hired Muirhead (the conveyancer) for his purchase transaction. Muirhead discovered judgments that affected title but, following the recommendations of a lawyer disqualified them as defects on title. Trusting Muirhead’s abstract, Watson went forward with his purchase but soon suffered sizable losses as a result of those liens: his property was sold in a Sheriff’s sale to satisfy the liens. Watson, of course, sued Muirhead to recover his losses, but the Pennsylvania Supreme Court ruled that there was no negligence on the conveyancer's part and dismissed the case.
The result of this court case, in which an innocent purchaser experienced a total loss of a title, but had no recourse, was to trigger the passage of the Pennsylvania Legislature Act “to provide for the incorporation and regulation of title insurance companies”. In 1876 a group of Philadelphia conveyancers formed the first title insurance company and shortly thereafter title insurance companies were established throughout the United States.
The American Land Title Association (ALTA) was formed in 1907 as the primary trade association for title insurance industry. At that time, title insurers issued their own forms of title insurance coverage, but soon by 1929 insurance carriers and ALTA agreed on a standardized policy. Over time, more title insurance products, policies and procedures were standardized on a national level to meet the current ALTA Practice and Policy standards.
Definition of Title Insurance
A surprising number of people do not know that title insurance is when they set out to buy a property. In the broadest sense, title insurance is an indemnity insurance that protects real estate owners and lenders against financial loss or damage sustained due to liens, encumbrances or other defects in the title of the insured property. Unlike regular liability insurance, which protects against future events, title insurance protects against monetary loss or defects that occurred in the past. Such defects include liens, judgments, outstanding lawsuits, unpaid taxes and water charges, unidentified covenants and restrictions, fraud, and forgery of the title documents.
Title insurance is crucial for a buyer of real property because it protects him/her from the possibility of jeopardizing ownership rights. the most common types of title insurance are Owner’s Title Policy, which protects the purchaser, Lender’s Title Policy, which protects mortgage lien holders, and Leasehold Policy for Coop apartment purchasers.
Title Insurance Underwriters and Agents
Naturally, an industry that started over 100 years ago has its major players. The big players in the fields include Fidelity, First American, Old Republic and Stewart. There is also a long list of independent title insurance companies, such as Westcor Land, WFG National, Security Title Guarantee, Premier Land Title Insurance Company, etc. These title insurance companies, sometimes called carriers or underwriters, are licensed by a State to issue title insurance policies either directly or through their agents.
On the other hand, title insurance agents are independent companies that have agency relationships with title insurance companies and are authorized to issue title insurance policies on behalf of the title insurance underwriters. For each policy issued by an agent, the underwriting insurance carrier receives a portion of the title insurance premium charged.
While many attorneys, home buyers and real estate investors prefer to deal with title insurance underwriters directly instead of dealing with an agent, I believe that they are misguided in this respect for the following reasons: first and most obvious I run my own title agency and so believe in the advantages of dealing with one. Second, good people make companies successful and I have hired the best staff possible with many years industry experience on average. My experience has proven that a boutique and experienced agent who has the knowledge of the entire Title process, and who does not have hundreds of clients like a large industry giant, has the necessary time to spend on each case and deliver top quality. At the end of the day, policies issued by the agents and insurers cover the same and cost the same. So in the end it's the quality of the service and the agency know how that matters.
Role of Title in Real Estate
Title companies play several key roles in real estate transactions. In the United States almost all real estate transactions involve a title insurer or an agent in some way. Before title can be insured, the title company will examine documents to determine insurability of title to property. A report will be issued and defects, if any, will be set forth and raised as objections to title. During the process, most defects in the title report will be worked on and cleared before everyone can come to the closing table.
When title and mortgage loan are clear, purchaser and seller are ready to close, a closing or settlement date will be scheduled. All parties will appear at the closing table; sellers and buyers with their attorneys, if represented, lender will be represented by its attorney and title will be represented by an independent or an in-house closer. It is customary outside of New York that the title company act as a settlement agent and handle mortgage loan proceeds and disbursements of funds at time of closing. Anyone who has been present at a real estate closing in New York would probably refer to the title company representative, aka the title closer, as the person sitting at the head of table. In fact, the title closer is a key participant to any real estate transaction.
In addition to checking and insuring good title to the purchaser and lender, it is the title company’s duty to make sure transfer and mortgage documents are recorded with the appropriate City Register’s office and all prior liens, mortgages, taxes and other charges that would adversely affect the insured purchaser are satisfied.