The title insurance industry plays a critical role in the US economy by facilitating the growth of the secondary mortgage market, thus enabling Americans to have a rate of home ownership that is among the highest in the world. The process of insuring the proper transfer of real estate from seller to buyer is critical to the real estate transfer process.

This process is accomplished by abstractors, lawyers, title insurance agents and title insurance companies, sometimes called "underwriters". At any real estate closing the parties must be assured that the title of the subject real property is as represented and expected. Title insurance brings confidence and certainty to real estate transactions.

The functions of search and examination of title provide the basic information concerning the legal interest affecting the title to real property. The title search and examination are more than an attempt to confirm the placement on the record of a subject mortgage; they are the underwriting process that distinguishes between significant and insignificant conditions affecting title. Underwriting is, essentially, a judgment process: discerning between the important and the irrelevant. This search and examination very often includes the curing of defects to title necessary to complete the transaction. There are few properties with "perfect" titles and, as such, title insurance was developed to guarantee the current status of the title based upon the search and examination.

Title search and examination requires the search of numerous public documents including tax, court judgment, deed, encumbrance, federal and state records and the evaluation of real property characteristics such as flood zone and location. The ensuing policy of title insurance guarantees the condition of ownership and property rights as represented and provides indemnification of the insured that has a fee (ownership), leasehold or mortgage lien interest in a specific parcel of property for any covered loss caused by a defect in title that existed as of the effective date of the policy.

Title insurance is the acceptance of risk for past transactional events rather then future occurrence of events. Unlike most other insurance which looks forward, title insurance looks to the past. And title insurance has a single one-time premium, no termination date and no time limit on the filing of claims.

Since title insurance involves the evaluation and acceptance of prior transaction-related risk, the underwriting process for title insurance differs markedly from almost all other types of insurance. The title underwriting process is designed to limit risk exposure through a through search and examination of the recorded documents affecting a particular property. Title insurance does not respond to future occurrences but only to past defects that were in place at the time the property was sold and weren't then recognized as a problem. Since title insurance is an evidence-producing/loss prevention line of insurance, its loss expense is far less and it's operating expense far greater than other property/casualty lines of insurance.

(Editor's Note: Peter Wittenborg serves as REBA's Executive Director. Prior to joining the REBA staff in 2002 he practiced real estate law in Boston.)