Title insurance history, perspective, and necessity


Home buyers would like to consider themselves as being financially savvy. Of course, I often hear the question about buying a home without title insurance, which usually arises from the advice they may receive from some questionable source debating the necessity of title insurance. However, the importance of title insurance is highlighted by recent ownership disputes that have occurred in the last five years due to foreclosures, improperly recorded deeds and mortgage modifications.

Historically, title insurance came about as a necessity. According to the American Land Title Association (alta.org), title insurance resulted from a landmark court case in Pennsylvania in 1868, which found that home seller was not be responsible for a erroneous title opinion. Subsequently, the first title insurance company was formed in 1876 in Philadelphia. The company promoted itself by claiming that they would insure “the purchasers of real estate and mortgages against losses from defective title, liens and encumbrances;” thus increasing the speed and accuracy of the property transfer process.

Prior to the availability of title insurance, title examinations were conducted similarly to how they are today with the purpose of ensuring title marketability (ensuring title is free of unpaid liens, mortgages, and other encumbrances). However, prior to the offering of title insurance, property owners were often held responsible for title blemishes. Of course, unresolved tile disputes were often settled in court.

Initially, title insurance was often a local process. However, the title insurance industry surged along with an expanded housing market after World War II ended. Additionally, the use of lender’s title insurance grew along with the secondary mortgage market; because as the number of nationwide mortgage holders increased, lenders found that title insurance was necessary to protect their interests.

Researching a property’s title relies on the “recordation system.” Although the recordation system has been in use in most of United States in some cases before the formation of the country, many countries use a land registration. Land registration systems used in some countries typically do not provide the same recourse as does the recordation system when disputes arise; where the registering government may resolve these disputes.

Title insurance is a result of our recordation system that continues to this day, where property ownership can usually be determined by conveyance. Although the recordation system relies on transfer instruments that indicate a grantor, grantee, and property description; the system is not perfect. Issues can arise from unrecorded deeds, as well as erroneously recorded documents; fraud may also occur by recording falsified transfer documents with a complicit or unsuspecting clerk.

There are two types of title insurance that are offered: lender’s and owner’s. A lender’s policy is usually required by a mortgage lender and is thought to protect the interests of the lender by validating the lender’s validity and enforceability of the mortgage. The lender’s policy is typically issued for the mortgage amount and coverage decreases as the principal is paid down.

An owner’s title insurance policy is understood to protect the owner’s interest in the property, however there may be limitations. You should consult with your title attorney about the policy coverage and limitations. Policy coverage varies– so check with your title agent for pricing and coverage levels.

A Consumer Guide to Title Insurance is available from the Maryland Insurance Administration, the local State agency that regulates title insurance producers (insurance.maryland.gov).

By Dan Krell
Copyright © 2013

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Original published at https://dankrell.com

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