Title insurance was invented after America's departure from British law and was only available in the United States at one time. Today, title insurance is a financial risk management tool in Canada, Latin America, the Caribbean, Asia, and Australia.
So how did title insurance emerge? In time for Independence Day, we’re taking a look at title insurance and its American roots.
Life, Liberty, and Property Rights
Prior to America’s independence, the 13 colonies followed the land laws of Great Britain by which land was only transferred to new ownership by permission of the Crown or overlord. The adoption of the English feudal system meant that a number of royals, nobles, knights, and generals received land holdings in the colonies. Virginia, for example, was divided between just seven Englishmen by the royal decree in 1649. These landowners proceeded to grant tenancies to settlers in the Americas. The property rights in the colonies remained largely unaffected by the sweeping changes taking place in England in the 1700s.
The Virginia Act of 1779 and the defeat of the British forces in 1781 led to the confiscation of all unsettled lands in the Americas by the newly formed American government. A few years later, the Land Ordinance of 1785 (which set how the US government would divide and distribute land it acquired from Great Britain) turned the entire system on its head. Now, land ownership was possible through purchase. This set in motion a distinctive American concept: real property ownership as a right regardless of noble birth. This revolutionary approach to land ownership provided Americans boundless economic opportunity as they could now use land as a source of capital.
A System to Securely Exchange Property
Before title insurance took hold, purchasing real estate in the United States involved conveyancers who would determine property rights based on public records and convey the property to a new buyer after the title was cleared of liens or other encumbrances. This system did not insure a new owner from human error in property searches or from any property rights not found in public searches. Therefore, property transactions were a risky endeavor.
In the 1868 case of Watson v. Muirhead, the Pennsylvania Supreme Court found a conveyancer named Muirhead not liable for mistakes in a title record search. Thus, the land owner, Watson, lost his real estate investment as a result of a prior lien on his property.
At the time of the Muirhead case, Philadelphia was expecting a real estate boom; however, the highly-publicized case worried potential real estate purchasers and mortgage lenders. As a result, the real estate market slumped. The first title insurance company, Real Estate Title Insurance Company of Philadelphia, formed in 1876 to encourage movement in the market through better protections for purchasers. With title insurance, the risk of losing a property to liens or defective titles decreased substantially and real estate transactions unfolded with greater security than ever before.
Title Insurance, An American Staple
After World War II, home purchases took off as soldiers returned home. Lenders needed a system to process a large volume of title insurance without needing to read individual policies. It was during this time that title processes and policies became more standardized. Today, title insurance continues on as a staple in real estate transactions in the United States and lives on as a reminder of America's independence from British law.