Title insurance was created when it became evident that traditional methods of exchanging property did not adequately safeguard the interests of all parties. Prior to the late 1860’s, real estate title transfers were generally conducted by conveyancers. Conveyancers researched the ownership rights of the seller and any other rights, liens, interests, or encumbrances that could affect the transfer of the property, and provided a signed description of the status of the title, based on their findings. Conveyancers were not usually lawyers, but were recognized as authorities on real estate law.
Watson v. Muirhead (57 Pa. 161) was filed in Pennsylvania in 1868, which changed the real estate transfer process forever. Muirhead, a conveyancer, researched a title for Watson, who was purchasing a parcel of real property. After consulting a legal expert, Muirhead (acting in good faith) chose not to take into account some recorded judgments. He reported the title as unencumbered, and Watson moved forward with the purchase. Watson was subsequently required to satisfy the liens that Muirhead had decided were not impairments to title. Watson sued Muirhead, hoping to recover the money he had lost; the Pennsylvania Supreme Court ruled that there was no negligence on Muirhead’s part and dismissed the case. Watson, though completely innocent, had no recourse.
The decision in this landmark case showed clearly that the conveyancing system could not provide total assurance that purchasers would be secure in their ownership of real property. The Pennsylvania legislature quickly passed an act “to provide for the incorporation and regulation of title insurance companies.” The first title company was founded in Philadelphia in 1876.
This new type of insurance addressed the problems raised by Watson v. Muirhead by providing financial protection by reducing the risk of insolvency, responsibility without proof of negligence, and the assumption of risks beyond those disclosed in public records.
The title insurance industry has grown to become an essential component in most real estate transactions in this country. The services provided by agencies may vary somewhat from one area to another, reflecting different laws and procedures, but the essential purpose is the same: to assist all parties in real estate transactions by ensuring that the transfer of real estate can be done with a maximum degree of security and efficiency.
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