The purchase of property is the most significant investment you can make. The essential parts of any property purchase are protecting and assessing against risk. Title insurance companies address these requirements.

Before title insurance was instigated, purchasing real estate was risky. During a property transaction, the rights of title to property were based on public records, word of mouth, and other property abstracts. Titles needed to be cleared of any liens or other encumbrances before conveying the property to new buyers, but resources were limited, and there was no title insurance backing reassuring the buyer that the property was free and clear. The risk of losing a property to unresolved ownership issues was high. If an unanswered issue caused a problem, the borrower or lender would have to prove legal negligence to collect damages. Collecting damages was almost impossible.

In 1868, the Pennsylvania Supreme Court ruled in the case, Watson v. Muirhead, 57 Pa. 161, that supposedly settled the matter of ownership over a property that was conveyed after a superficial title records search. During research in the Watson v. Muirhead case, a lien on the property was found. Watson properly turned to an attorney for a legal opinion, and the attorney advised that the lien was not valid. The property was sold, and the transaction completed.

Not long after conveyance, a dispute arose, and the property was ultimately sold at a sheriff’s sale. The reason? To pay off the lien, which was in all truth, lawful. 

The buyer took the issue to the Supreme Court in Pennsylvania, who ruled that the sale was unlawful, and the lien needed to be satisfied. The buyer tried to sue the seller for damages, but the seller was not held liable for the misinformation. He had relied on the attorney’s opinion the lien was invalid and went on with the sale in good faith.

The judgment and the loss to the buyer prompted a group of Philadelphia conveyancers to find a way to protect innocent buyers of property problems. This group headed by Joshua Morris met in 1876, and formed one of the first title insurance companies, Real Estate Title Insurance Company of Philadelphia. The mission statement of title insurance stated, “To protect the purchasers of real estate and mortgages against losses from defective title, liens, and encumbrances. Through these facilities transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore.”

After this decision by the Pennsylvania Supreme Court, title insurance companies have become a part of the buying and selling transaction. It is recommended that title insurance be purchased at the beginning of a property transaction.

Recording Become Important

Today, there is a recording system that occurs every time a property sale takes place. The parties record the transfer with a government entity (usually the county), and the recording agency lists the property by the names of the transferor and the grantee. The document is also photographed so anyone can find and examine it.

Having a recording system gives the parties involved in the property transfer the following advantages.

  • The recording system, along with title insurance, decentralizes records and creates copies or redundancy. As an example, documents are held in one government jurisdiction, and also maintained in other locations.
  • An independent authority reviews government land transfers.
  • A recording system provides conveyance of land in homesteading or inheritance circumstances.
  • A title insurance company can review government land transfers. With proper registration and insurance, the government can decide disputes.

Title insurance companies conduct title searches on public records before they insure the purchaser or mortgagee of the property. After a real estate sales contract has been signed and escrow opened, title insurance companies search public records to find any problems with the property’s title. The search can involve a review of land records going back many years. It’s interesting to note that more than one-third of all title searches reveal a title problem that must be corrected before the transaction closes.

Title insurance companies can find where previous owners may have had minor work done on the property and never paid the contractor, and a lien is filed. The previous owner may have failed to pay taxes, which results in a tax lien. If these problems are not found and resolved by a title insurance company, the conveyance of the property could be halted and delayed.

Title insurance is a form of indemnity insurance that protects the holder from financial losses occurring from defects in a title to a property. Title insurance companies research titles through public records to determine if there are any liens on the property. 

Having title insurance protects real estate owners and lenders against loss or damage coming from liens, defects in the title, or encumbrances. Title insurance protects against claims for past occurrences.

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