Title insurance is a product that protects the purchaser of the policy – usually either a property owner or a mortgage lender – in the event that there is a problem with the title of the covered property. Some title insurance policies can also pay for the cost of researching the title to make sure that it is unencumbered or unimpaired prior to a real estate closing.
There are many ways that titles can be impaired, but in most cases the main concern is that some unknown party (such as an individual, a lender, or another entity) has an ownership interest in or lien on the property that was not made clear when the property was listed for sale.
One example of a title issue would be an invalid or fraudulent land title. For example, suppose that a man inherits property from his parents that he shares jointly with his brother. He decides to sell the property without informing his brother or telling the buyer about the other owner. But after the sale, the brother attempts to make a claim to the current owner that he owns half of the property. This type of frightening situation can be prevented with title insurance, which both searches for any such claims against the title, and provides insurance to pay some of the costs if an unknown claim arises.
Another, more common, example has to do with liens. Liens are claims against a property, usually because it was used as collateral on a loan, but also sometimes for other reasons (such as unpaid back-taxes, or the claims of a builder or contractor). Because a lien-holder has a right to the property if the lien is not paid, an individual purchasing property with an undisclosed lien could end up losing his or her investment. While most purchasers use a lawyer or other service to conduct a title search to ensure the property is unencumbered, in some cases, that search may not be complete. A title insurance policy guarantees that a property has no known defects, liens or encumbrances, and will pay the purchaser or mortgage holder for his or her loss of access to the property if such a lien is discovered.
While title insurance policies are available in other countries, they are most commonly found in the United States because laws about land records have not always been as consistent in the U.S. as elsewhere. The first title insurance company was created in Pennsylvania in 1874 in response to a lawsuit related to a title dispute.
