Overview of Title Insurance

Title insurance typically is defined as insurance against defects in, or liens or encumbrances on the title. In many jurisdictions, title insurers may insure title to real estate, while in some, they also may insure title to personal property, or proper execution of notes or other obligations. Most states prohibit title insurers from guaranteeing debts or other obligations, or prohibit title insurers from undertaking other types of insurance. These prohibitions were enacted in response to the failures in the 1930s of title insurance companies because they guaranteed mortgage loans.

Viewed from one perspective, title insurance may be considered a misnomer: the policy is an attempt to reconcile abstracting information and an insurance product but does not, by its express terms, represent the status of title. The most commonly used title insurance contracts, the American Land Title Association (ALTA) policies, do not purport to represent the condition of title. Rather, they are indemnity contracts against actual monetary loss because of title matters, such as defects, liens, and encumbrances. Nevertheless, there has been a widespread conflict over the issue of whether the contract terms of indemnity generally prevail, or whether extra contractual liability for negligence will be recognized.

This issue may be restated: shall the contractual limitation on damages (including the stated limit of insurance) prevail based on the contract, charge of premium for stated insurance, and dedication of statutory premium reserve; or shall the "expectation" of the insured result in liability for consequential damages, without an absolute limit on loss. In approximately one-half of the states no recognized answer (statutory or case law) exists; in the remaining jurisdictions, opinion is roughly split in half, with some states rejecting liability for negligence under the policy and/or commitment (or binder or preliminary report) and other states allowing the cause of action.

Whatever the result of that debate, title insurance is often described as "unique." It constitutes an attempt at risk avoidance, with a substantial part of title insurance cost generally allocated to search, evaluation/examination, or clearing underwriting objections. Consequently, losses and attorney's fees incurred by the major title insurers have recently been between 3% and 7% of their total operating income. State law often codifies this risk avoidance approach: A title examination of some sort is required by statute in a number of states; similarly, many states require application of sound underwriting practices as a condition to issuance of the policy.