A brief history of title insurance
6 July 2010
We'll skip the wandering communities foraging the land, William the Conqueror introducing the feudal system, the British colonial deed conveyance system and the Agricultural Revolution. Let's pass on the American colonies of the 1700s, the 1848 Treaty of Guadalupe Hidalgo, and the advent of sectional township and range lines in 1852. We'll also skip over the wild and woolly days of land rushes and frontier settlements. And while we're at it, let's forget about the purchase of the Island of Manhattan in New York State for a handful of glass beads (the deed was lost anyway) and get right to the heart of the matter.
In the Beginning
Title insurance is purely and uniquely an American product developed to manage real estate investment risk. But during the first 100 years of US history, the name of the game wasn't title insurance at all, it was - caveat emptor - "let the buyer beware." Conveying real property did not include any form of guaranty or insurance.
Historically, before taking title to a property, the buyer required that the title be free of any existing rights, interest, liens or encumbrances for which the buyer would be responsible. At the time, transferring title to real property was handled primarily by conveyancers, some of whom were attorneys. They were responsible for all aspects of transactions including title search and discovery of any encumbrances on the title. Based on their search, conveyancers provided signed abstracts (or descriptions) of the status of title. However, there were no assurances protecting the buyer from fraudulent conveyances or undisclosed encumbrances on the property. Unfortunately for the buyer, the abstract - then, as well as today - merely reports the recorded history of a property; it does not judge the correctness of any item listed.
The need for some sort of assurance arose when the traditional methods of conveying failed to provide safety to investors. And as you can imagine, many purchasers and lenders lost their investments; which leads us to the ill-fated Mr. Watson and the lucky Mr. Muirhead.
What Watson and Muirhead Had To Do With It
It wasn't until 1868 that the problem drew public attention in the celebrated Pennsylvania Supreme Court case of Watson v. Muirhead (57 Pa. 161). After losing his investment at a sheriff's sale as a result of an outstanding prior lien, Mr. Watson, (the buyer) sued Mr. Muirhead (the searcher/conveyancer). The conveyancer had uncovered the lien, but represented the title as clear after an attorney advised that the lien was not valid. The court eventually ruled that conveyancers and attorneys could not be held liable for erroneous opinions based on professional standards of evaluations. This landmark case demonstrated the need for better protection of real estate purchasers when the court ruled that Muirhead had acted reasonably and within legal "standards of care" and held that Watson had no recourse. And as you may have already surmised; Watson lost both his lawsuit and his investment. If the unfortunate Mr. Watson had been able to purchase a title policy; he would have made a claim under the policy, seeking indemnification of loss, rather than go to court.
An Industry is Born
A group of individuals interested in the law of real estate decided that something should be done to protect innocent investors from such similar hazards arising from errors in reporting the status of title. So in 1876, a group of conveyancers led by Joshua H. Morris met in a small office in Philadelphia, Pennsylvania to incorporate the world's first title insurance company, The Real Estate Title Insurance Company of Philadelphia. In that same year, the industry's first title insurance policy was issued to Martha Morris (a relative of Joshua?) to protect her loan on a residential row home in Philadelphia. During the following ten years title insurance companies were established in many of the major cities on the East Coast of the US. Title insurance became more prominent after World War I and then became the norm with the real estate boom that followed World War II. Since the secondary mortgage market requires title insurance on newly originated loans, a large part of the growth in title insurance has been a result of it being required by banks and institutional lenders alike.
Today, this American product, modified and adapted for distinct international markets, is increasingly utilized to protect real estate investments across the globe - including Europe, Asia Pacific, Canada and the Americas South region of Mexico, Caribbean and Central and South America.
John D. Markunas, VP International Business Development
First American Title Insurance Company, International Division