Title Insurance - Reason For Existence

Reason For Existence

Title insurance exists in the U.S. in great part because of the way U.S. land records laws are structured. Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government makes the determination of title ownership and encumbrances on the title based on the registration of the instruments transferring or otherwise affecting the title in the applicable government office. 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 many countries.

A few jurisdictions in the United States have adopted a form of this system, e.g., Minneapolis, Minnesota and Massachusetts. However, for the most part, the states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid.

Greatly simplified, 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. In general, if the transferor then purports to transfer the property to someone else who does not know he already transferred it to someone else, and the first transfer was not recorded, that transfer is void with respect to the second transferee and the second transferee owns the land.

Under this system, to determine who has title, one must:

• Examine the indexes in the recorders' offices, pursuant to various rules established by state legislatures and courts
• Scrutinize the recorded instruments
• Determine how they affect the title under applicable law. The final arbiters of title matters are the courts, which make decisions in suits brought by disagreeing parties. Initially, the person who wanted to understand the title would hire an abstractor to search for the documents affecting title to the land in question, and an attorney to opine on their meaning under the law; this is still normal in some places. However, in most of the U.S., people have found this procedure cumbersome and inefficient. If the abstractor or attorney makes a substantial error, he compensates his client only to the limit of his financial responsibility (including his liability insurance). Furthermore, if the error was not due to his negligence, the abstractor or attorney may not compensate the client at all. The opinions given by attorneys as to each title are not uniform, so the client must spend time analyzing each one and has a risk of misunderstanding it.

Title insurers use this recording system to produce an insurance policy for any purchaser or mortgagee of land. Title insurers search the records of the recorders' offices and make a determination of who owns the title and to what interests it is subject. The policies are fairly uniform (a fact that greatly pleases lenders and others in the real estate business) and the insurers carry, at a minimum, the financial reserves required by insurance regulation to compensate their insureds for valid claims they make under the policies. This is especially important in large commercial real estate transactions where many millions of dollars are invested assuming real estate titles are valid. Under such a policy, the insurer also pays for the defense of its insured in legal contests. In contrast, abstractors and attorneys have no such obligation.

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. For example, Karl Llewellyn pointed out that 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 staunchly defended traditional title recording by arguing that a property system which is inherently contingent provides a stronger guarantee of private property rights over the long run. The critical flaw from the American perspective is that title registration is deeply vulnerable to fraud, and if not operated properly, can and has resulted in more litigation than title recording. Although effective countermeasures against fraud are feasible, they usually require large lawyer-staffed bureaucracies and in turn, much higher taxes, all of which are anathema to American taxpayers. Thus, a 2007 book attacking the American title insurance "cartel" acknowledged that "ore extensive use of Torrens certification would require setting up a special judicially supervised bureaucracy."