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Title insurance is a form of indemnity insurance, predominantly found in the United States and Canada, that insures against financial loss from defects in title to real property and from the invalidity or unenforceability of . Unlike some land registration systems in countries outside the United States, US states' recorders of deeds generally do not guarantee indefeasible title to those recorded titles. Title insurance will defend against a lawsuit attacking the title or reimburse the insured for the actual monetary loss incurred up to the dollar amount of insurance provided by the policy.
The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853.D. B. Burke, Jr., Law of Title Insurance, Little Brown & Company (1986) § 1.1, p. 2. Typically the real property interests insured are fee simple ownership or a mortgage law. However, title insurance can be purchased to insure any interest in real property, including an easement, lease, or life estate.
There are two types of policies – owner and lender. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance. Buyers purchasing properties for cash or with a mortgage lender often want title insurance as well.
A loan policy provides no coverage or benefit for the buyer/owner and so the decision to purchase an owner policy is independent of the lender's decision to require a loan policy.
Title insurance is available in many other countries, such as Canada, Australia, the United Kingdom, Mexico, New Zealand, Japan, China, South Korea, and throughout Europe. However, while a substantial number of properties located in these countries are insured by U.S. title insurers, they do not constitute a significant share of the real estate transactions in those countries. They also do not constitute a large share of U.S. title insurers' revenues. In many cases these are properties to be used for commercial purposes by U.S. companies doing business abroad, or properties financed by U.S lenders. The U.S. companies involved buy title insurance to obtain the security of a U.S. insurer backing up the evidence of title that they receive from the other country's land registration system, and payment of legal defense costs if the title is challenged.
In 1868, the case of Watson v. Muirhead was heard by the Pennsylvania Supreme Court. Plaintiff Watson had lost his investment in a real estate transaction as the result of a prior lien on the property. Defendant Muirhead, the conveyancer, had discovered the lien prior to the sale but told Watson the title was clear after his lawyer had (erroneously) determined that the lien was not valid.
The courts ruled that Muirhead (and others in similar situations) was not liable for mistakes based on professional opinions. As a result, in 1874, the Pennsylvania legislature passed an act allowing for the incorporation of title insurance companies.
Joshua Morris, a conveyancer in Philadelphia, and several colleagues met on March 28, 1876, to incorporate the first title insurance company. The new firm, Real Estate Title Insurance Company of Philadelphia, would "insure the purchasers of real estate and mortgages against losses from defective titles, liens and encumbrances," and that "through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore."
Morris' aunt purchased the first policy, valued at $1,500, to cover a home on North 43rd Street in Philadelphia.National Title-Duluth, Inc. TITLE INSURANCE: AN AMERICAN TRADITION ". Accessed November 5, 2008.
Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government determines title ownership and encumbrances using its land registration; with only a few exceptions, the government's determination is conclusive. Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property. The Torrens title system is the basis for land registration systems in several common law countries. Nineteen jurisdictions in the United States, such as Minnesota and Massachusetts, adopted a form of this system between 1896 and 1917, however it fell out of favor after a single judgement in Imperial County, California, bankrupted the state's title indemnification fund, and the vast majority of U.S. states have opted for a system of record title in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid.
In the recording system, each time a land title transaction takes place, the parties record the transfer instrument with a local government recorder located in the jurisdiction (usually the county) where the land lies. The government indexes the instrument by the names of the grantor (transferor) and the grantee (transferee) and photographs it so any member of the public can find and examine it. If such a transaction goes unrecorded for any reason or length of time, an unscrupulous grantor could sell the property to another grantee. In many states, the grantee whose transaction is recorded first becomes the legal owner, and any other would-be buyers are left without recourse.
The advantage of the recording system is:
Under this system, to determine who has title, one must:
Title insurers conduct a title search on public records before they agree to insure the purchaser or mortgagee of land. Specifically, after a real estate sales contract has been executed and escrow opened, a title professional will search the public records to look for any problems with the home's title. This search typically involves a review of land records going back many years. More than one-third of all title searches reveal a title problem that title professionals will insist on fixing before the transaction closes. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor (resulting in a mechanic's lien), or the previous owner may have failed to pay local or state taxes (resulting in a tax lien). Title professionals seek to resolve problems like these before the transaction closes, since otherwise, their employer, the title insurer, will be required to fix such title defects by paying such unpaid fees or taxes.
Title insurance policies are fairly uniform, and backed by statutory reserves, which is especially important in large commercial real estate transactions where the buyer and their lender have a large amount of money at stake. The insurer also pays for the defense of its insured in legal contests.
At least 20 U.S. states have experimented with Torrens title or other title registration systems at one time or another, but most have retreated to title recording under pressure from title insurers or from lack of interest. According to Karl Llewellyn, one Torrens title on one lot in New York City can render the entire block unavailable for large-scale improvement (i.e., skyscrapers); no lender will finance the purchase of such a lot because no New York title insurer will guarantee a Torrens title. The U.S. title insurance industry has successfully opposed land registration systems by saying that they are vulnerable to fraud (a severe problem in most land registration jurisdictions) and by contending that an inherently contingent property system more effectively protects property rights. Their contention is also that, while it is possible to fortify land registration systems to prevent the registration of forged deeds, the necessary countermeasures are complex and expensive. A 2007 book attacking the American title insurance "cartel" acknowledged that "more extensive use of Torrens certification would require setting up a special judicially supervised bureaucracy."
The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverages can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy may be paid by the seller or buyer as the parties agree. Usually a custom in a particular state or county on this matter reflects in most local real estate contracts. One should inquire about the cost of title insurance before signing a real estate contract that provides that he pay for title charges. A real estate attorney, broker, escrow officer (in the western states), or loan officer can provide detailed information as to the price of title search and insurance before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.
The American Land Title Association (ALTA) forms are almost universally used in the country though they have been modified in some states. In general, the basic elements of insurance they provide to the lender cover losses from the following matters:
As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack.
Elements 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Element 3 covers matters that will interfere with its foreclosure.
Of course, all of the policies except or exclude certain matters and are subject to various conditions.
There are also ALTA mortgage policies covering single or one-to-four family housing mortgages. These cover the elements of loss listed above plus others. Examples of the other coverages are loss from forged releases of the mortgage and loss resulting from encroachments of improvements on adjoining land onto the mortgaged property when the improvements are constructed after the loan is made.
Founded in 1907, ALTA has created standard forms of title insurance policy "jackets" (standard terms and conditions) for Owners, Lenders and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not issue title insurance; it provides standardized policy and endorsement forms that most title insurers issue.
Some states, including Texas and New York, may mandate the use of forms of title insurance policy jackets and endorsements approved by the state insurance commissioner for properties located in those jurisdictions, but these forms are usually similar or identical to ALTA forms.
In addition to ALTA, the National Association of Independent Land Title Agents (NAILTA) is a national non-profit trade association that represents the interests of independent title insurance agents and independent real estate settlement professionals from across the United States. It was created by independent real estate settlement professionals to further the agenda of small business owners from within the title insurance, abstracting, surveying, and real estate community who lack representation at local, state and national levels. NAILTA is a national trade association that serves thousands of independent title and real estate professionals across the United States who collectively comprise over 60% of the national title insurance market,See Demotech Performance of Title Insurance Companies 2012, p. 104. Non-affiliated (independent) premiums written in 2011 totaled $5,575,537,135.00 or 60.19% of the overall title insurance market. and identify themselves as independent settlement service providers. NAILTA represents the interests of those independent settlement service providers who serve over 31 million real estate purchase consumers per year, (visited October 25, 2012). who close an estimated $514.8 billion's worth of refinance mortgages per year, (visited October 26, 2012). Estimates based upon 2011 figures. and who collectively insure approximately $1.67 trillion in total national title insurance liability per year.Assuming a $3.00 per thousand average national rate of insurance premium and over $5.6 trillion in independent service provider-related written title insurance liability per annum. See Demotech, p. 104, supra.
The explanation above discloses another difference between title insurance and other types: title insurance premiums are not principally calculated on the basis of actuarial science, as is true in most other types of insurance. Instead of correlating the probability of losses with their projected costs, title insurance seeks to eliminate the source of the losses through the use of the recording system and other underwriting practices. As a result, a relatively small fraction of title insurance premiums are used to pay insured losses. The great majority of the premiums is used to finance the title research on each piece of property and to maintain the title plants used to efficiently do that research. There is significant social utility in this approach as the result conforms with the expectations of most property purchasers and mortgage lenders. Generally, they want the real estate they purchased or lent money on to have the title condition they expected when they entered the transaction, rather than money compensation and litigation over unexpected defects. This is not to say that title insurers take no actuarial risks. There are several matters that can affect the title to land that are not disclosed by the recording system but that are covered by the policies. Some examples are deeds executed by minors or mentally incompetent persons, forged instruments (in some cases), corporate instruments executed without the proper corporate authority and errors in the public records. However, historically, these problems have not amounted to a high percentage of the losses paid by the insurers. A more significant percentage of losses paid by the insurers are the result of errors and omissions in the title examining process itself.
A federal law called the Real Estate Settlement Procedures Act (RESPA) entitles an individual homeowner to choose a title insurance company when purchasing or refinancing residential property. Typically, homeowners do not make this decision for themselves and instead rely on their bank's or attorney's choice; however, the homeowner retains the right to choose a different insurer. RESPA makes it unlawful for any bank, broker, or attorney to mandate that a particular title insurance company be used. Doing so is a violation of federal law and any person or business doing so can be fined or lose its license.
Section 9 of RESPA prohibits a seller from requiring the buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. The only exception to this rule applies to commercial real estate transactions, which is not within the parameters of RESPA.
The new Loan Estimate form (LE) is the latest step taken by Department of Housing and Urban Development (HUD) to protect and assist consumers. In the past, lenders had provided potential borrowers with Good Faith Estimates (GFEs).
1. Lenders must issue the LE within three business days of loan application. However, many will provide the form to borrowers who are still in the shopping phase. Note that the LE provides more protections for consumers than a "worksheet" or "scenario" because lenders must by law adhere to its costs and indicate how long that rate and fee will be in effect.
If a loan originator does not provide the LE within three business days of receiving a completed loan application, it is in violation of Section 5 of RESPA. HUD provides the specific criteria for what constitutes a complete loan application:
2. The new LE is standardized
3. The new LE encourages consumers to shop
4. Lenders are accountable for their quotes
5. At the closing, lenders must issue a Closing Disclosure (CD) disclosing the actual costs. The borrower can compare the actual costs to the estimated costs. Costs fall into several categories, and differences between the actual and estimated costs are treated accordingly:
When a lender, real estate broker, or other participant refers his homebuyer to an affiliate for a settlement service (such as when a real estate broker refers his homebuyer to a mortgage broker affiliate), the law requires the referring party to provide an affiliated business arrangement disclosure. This disclosure informs homebuyers they are not required to use the affiliate and are free to shop for other providers.
Despite advances in technology that allow homebuyers to shop for title services, many homebuyers remain unaware that they may select their own title insurance or settlement company.
A recent survey from the Ohio Association of Independent Title Agents (OAITA), conducted from 2009 through 2010, showed when homebuyers are made fully aware of ABAs, they become uncomfortable and prefer a title company or title agent to be a third party (i.e., independent) to the transaction.
While 77% of respondents did not independently select their settlement company, when made fully aware of the ABA relationships 50% of respondents said they prefer a title company that does not share profits with a referral source compared to 6% of respondents saying they prefer a title agent that shares profits with a referral source. Further, 58% of respondents said they believe that ABAs are a conflict of interest.
The OAITA stands in stark contrast to two Harris Interactive surveys used by the Real Estate Services Providers Council in a January 2011 meeting with Federal Reserve staff to claim that homebuyers were more satisfied with the ABA settlement service providers.
Organizations such as the National Association of Independent Land Title Agents seek to restore transparency and credibility to the land title process and to preserve an objective and impartial role at the closing table to improve the consumer experience, by addressing the proliferation of controlled business arrangements and eliminating conflicts of interest between title agents and their referral sources, as well as between all real estate settlement service providers and their sources of business.
Title insurance premium rates are based on five cost considerations, including those related to:
The rates may include discounts if title insurance is ordered within a specified time after the last policy issued or if the mortgage being insured is a refinance of an earlier mortgage. In the states employing any of these regulations, it is illegal for title insurance companies to charge a higher or lower rate than the regulated rate.
For example: In Pennsylvania there are two rates, basic rate and reissue rate. The basic rate would apply if it has been more than ten years since the last policy was issued. If less than ten years, the reissue rate applies. The reissue rate offers a discount of approximately ten percent off of the basic rate. If the transaction is a refinance, the savings can be as much as thirty percent off of the reissue rate. These rates and applicable discounts are filed with and approved by the Pennsylvania Insurance Commission.
Title insurance is substantially different from other lines of insurance because it emphasizes risk prevention rather than risk assumption. This means the majority of the premium dollar, about 80 percent, covers the work performed by title professionals, such as the search examination, curative work, policy issuance and, frequently, the settlement or closing. The remaining 20 percent covers the insurance policy, a significant portion of which is put into reserves for claims that could occur 10 or 20 years in the future. According to a 2006 survey by ALTA,American Land Title Association title problems that required curative action were found in 36 percent of all residential real estate transactions in 2005. This was up from 25 percent in 2000, due to the booming real estate market and an increase in transactions.
In 2012, according to ALTA, the industry paid out about $908 million in claims, about 8.1% of the $11.2 billion taken in as premiums. By comparison, the boiler insurance industry, which like title insurance requires an emphasis on inspections and risk analysis, pays 25% of its premiums in claims. As mentioned above, professionals in the land title industry seek to prevent claims through up-front preventive measures before a policy is issued and therefore the industry's claims ratio is different from other lines of insurance.
According to the statutory accounting rules for title insurance, only reported claims are reflected in the loss expense, while in other lines—both reported and unreported claims are included in the loss expense. As a result, timing differences occur in the reporting of losses and loss-adjustment expenses for title insurance when compared to other lines.AM Best Special Report In addition, title insurance, unlike most other property/casualty exposures, has no termination date and no time limitation on filing claims.
In many states, the price of title insurance is regulated by a state insurance commission. In these states, the title insurance companies lobby state legislators and other politicians and donate to their campaigns, in the hopes of maintaining high rates. Unlike other forms of insurance (such as life, medical, or home owners), title insurance is not paid for annually, as it has one payment for the term of the policy, which is in effect until the property is resold or refinanced.
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