In 1868, the concept of title insurance began as a result of needed improvement to the traditional methods of conveying real property. At the time, the process did not provide confidence and safety to the parties involved in a real estate transaction. Historically, the transfer of title to real property was performed by conveyancers who were recognized authorities on real estate law but generally not lawyers. Conveyancers spearheaded all aspects of the transaction, including a title search, to determine the ownership rights of the seller and any other rights, interests, liens or encumbrances that might “cloud” the property’s title.
From the search, the conveyance then delivered a description (abstract) of the title’s status that laid the groundwork for the conveyancer’s opinion as to how clean or clouded the title. Due to inadequate public records, conveyancers had limited ability to ensure adequate buyer confidence. There was also the risk that their good faith opinion might ignore certain clouds on title or lack thoroughness. As a result, buyers were left to unfortunately bear the full risk of any title issues that might arise following their real estate purchase. The case of Watson v. Muirhead (57 Pa. 161) was filed in Pennsylvania in 1868 which is directly traceable to the limited protection issue of the time concerning the work a conveyancer provided to the purchaser of real property.
Muirhead, a conveyancer, had searched and abstracted a title for Watson, the purchaser of a parcel of real property. Muirhead chose to ignore certain recorded judgments and reported the title as good and unencumbered after consulting an attorney. As a result, Watson purchased the property but was later presented with liens that Muirhead had determined were not title impairments. The Pennsylvania Supreme Court ruled that there was no negligence on the conveyancer’s part and dismissed the case. The decision clearly demonstrated that, in the existing conveyancing system, the buyer would bear the full risk should an issue on title come up after purchasing the real estate.
This decision ignited the Pennsylvania legislature to later pass an act “to provide for the incorporation and regulation of title insurance companies” and the first title company, The Law of Property Assurance and Trust Society, was founded in Philadelphia in 1876. Addressing the concerns in Watson v. Muirhead, title insurance provided responsibility without proof of negligence, financial protection through a reduction of the risk of insolvency, and the assumption of risks beyond those disclosed in the public records (for which the abstractor was not liable). Title insurance has become an integral part in the majority of today’s real estate transactions in the United States. Regulated by state insurance agencies, the services of title insurers vary in different states and counties due to different laws, procedures and customary practices. Nonetheless, the critical objective is steadfast – to ensure all parties acquiring or transferring an interest in real estate can do so with the highest level of efficiency, security and safety.
Did You Know? Benjamin Franklin laid the groundwork for the model and concept of title insurance as we know it today?
Title insurance is available in Canada, England, Northern Ireland, Mexico, New Zealand, China, Korea, Australia, and throughout Europe?
Unlike other forms of insurance, title insurance emphasizes prevention rather than the assumption of risk.