What is Title Insurance?
(...and A Brief History of Property Ownership)

"King of the Hill"
The concept of private or individual ownership that we know today has not always existed.

Kings in the Middle Ages proclaimed ownership to all the lands they conquered. Unlike personal possessions that can become obsolete, wear out, and lose their value, land is immobile and, by comparison, indestructible. It is for these reasons that land and the control of land became a symbol of power. Conquests of certain lands resulted in the establishment of harbors from which even the seas could be ruled.
The feudal lords operated only by permission of the king. The king's chosen subjects would occupy land by a right of license from the king. However, these lands were always subject to the king's first rights as well as the king's taxes on the land and what the land produced.

It is what the land could produce in an agrarian society that established land as a symbol of wealth. Land truly was wealth because it took land to be able to produce items of value for barter and exchange.

Over time, the people who were first granted only the right to use the land decided they wanted to maintain ownership, so they developed methods for obtaining conveyances from the monarch that eventually allowed the property to be inherited rather than revert back to the monarchy.

Ownership is a "bundle of sticks"
Through the centuries, the traditions of real property developed. Most of the traditions we follow in the United States descended from the English system of court decisions generally referred to as the "Common Law." The "Common Law" principals concerning property basically viewed ownership as an assortment of interests or rights that applied to different aspects of the land. One way to view the "Common Law" principals of ownership under which we operate today is like a "bundle of sticks." A land owner typically owns all of the rights-the whole "bundle of sticks" and may choose to give away or share one or more rights with others. For example, a property owner may give a leasehold interest to another, and then that person "owns" the right to occupy the property for a period of time, even though the owner keeps the remaining rights (or "sticks") of ownership. Other "sticks" might include the right to mine precious metals, an easement right to use a portion of the property, or perhaps a life estate. Together, this "bundle of sticks" makes up what we today call "ownership."

The United States originally fell under several different sovereign rules, including England, France, Spain, and Mexico. The American Revolution established the United States of America as the sovereign and owner of all lands not already granted to someone else. Most of these lands have since been granted to individuals under government patents and subsequent conveyances by deeds.

Before title insurance...
Prior to the advent of title insurance, the conveyance of property did not include any form of guarantee or insurance. A purchaser had virtually no guarantees that the property he was buying was even owned by the person who was selling it! Even though attorneys would render their opinion of title based upon a title "abstract," there were no assurances protecting the buyer from fraudulent conveyances or undisclosed encumbrances on a property. An "abstract" merely reports the recorded history of a property; it does not judge the correctness of any item listed.

In 1868, Watson, an innocent purchaser, suffered financial damage because of certain encumbrances on the title to his property. He sued Muirhead, the grantor, alleging negligence for failing to disclose those encumbrances when he sold the property. This landmark case (Watson v. Muirhead, 57 Penn. 161) demonstrated the need for better protections of real estate purchasers when the court ruled that Muirhead had acted reasonably and within legal "standards of care" and held that Watson had no recourse.

As a result of this case, the Pennsylvania legislature enacted a law allowing and providing for the incorporation of title insurance companies. The first title insurance company was organized and opened in 1876 in Philadelphia. There was large consumer demand for greater security, as well as expedience in real estate transactions, and so the title insurance industry grew rapidly and spread to other major cities.

Title Insurance...a new concept
Unlike casualty insurance (auto or fire or health insurance, for example) which protects against future events, title insurance protects against losses arising from unknown or undisclosed defects in the past chain of title. Unlike casualty insurance premiums, which are paid in continual installments (hence a lapse in payment may mean a lapse or cancellation in coverage), a title insurance premium is a one-time flat fee regulated by the Division of Insurance and paid at the time of closing. For this one-time premium, an owner's title insurance policy remains in effect as long as the insured or the insured's heirs retain an interest in the property or have any obligations to warrant the property when they sell it.

A policy of title insurance is like a pre-paid legal agreement. The title insurance company will provide legal defense against any challenges to an insured's title (depending, of course, upon the type of policy coverage) and will reimburse the insured financially for any losses as a result of hidden defects in ownership rights.

Hundreds of ways to lose your property...
A forgery 50 years ago....a deed executed under duress....bigamy that went unknown....an error by a clerk in the county recorder's office....an undisclosed heir that resurfaces ten years later and demands his right to a property....a misapplied tax payment: These are but a few of the hidden title defects that could cause you to lose your property. And even if you don't lose your property altogether, certain title problems can make it impossible for you to sell or even give it away.

You don't want a problem that occurred long before you bought your property to deprive you of the right to use or dispose of it. And you don't want to pay the potentially ruinous cost of defending your property rights in court. A title insurance policy from Land Title is your best protection against potential defects that could remain hidden despite the most thorough search of public records.

Here are some of the more common possible title defects that title insurance covers:
· Forged deeds, releases, or wills;
· False impersonation of the true owner of the property;
· Undisclosed or missing heirs;
· Instruments executed under invalid or expired powers of attorney;
· Misinterpretations of wills, or discovery of a later will after probate of first will;
· Deeds by minors, by persons of unsound mind, or by persons supposedly single but in fact married;
· Liens for unpaid estate, inheritance, income, or gift taxes;
· Mistakes in recording of legal documents, or deeds recorded but improperly indexed and therefore not found through a title search;
· Disputed release of prior mortgage or lien, as given under mistake or misunderstanding; or ineffective release of prior mortgage, as fraudulently obtained by predecessor in title;
· Undisclosed divorce of one who conveys as a sole heir of a deceased former spouse;
· Deed to or from a "corporation" before incorporation or after loss of corporate charter; and
· Claims resulting from the use of "alias" or fictitious names by a predecessor in title.

These are just some of hundreds of ways in which the title of a property owner could be challenged or deemed "unmarketable." For more information on how Land Title can help educate home buyers and sellers on the importance of title insurance, please contact us.

Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought.