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Title insurance is perhaps the least understood aspect of a real estate transaction. Title insurance differs from other forms of insurance in that its focus is primarily upon risk avoidance or risk elimination rather than risk assumption and distribution. In the title insurance business risk recognition is of paramount importance, particularly where the new "value added" policy issued. When a title company's services are engaged to search the public record they have an obligation to disclose to the proposed insured irregularities or "defects" in title which may put the proposed insured in a position of peril or subject them to litigation or serious financial loss. The company has the responsibility to properly and accurately search and report the state of title in the preliminary commitment. Where an instrument in the chain of title imposes covenants, restrictions, conditions, limitations, charges, obligations, liens or other encumbrances, the title company should specifically articulate those matters in the commitment to insure. That commitment is only as good as the knowledge and competence of the persons performing the underlying search and examination of title. If the principal function of title insurance is the discovery and clearance of title defects underwriting is the vehicle by which those defects may be discovered. Title insurance underwriting is the conscious process of evaluating risk and its primary purpose is to minimize risk. The title insurance underwriting process is therefore concerned with the source, accuracy and reporting of information which affects the issuance of a title insurance policy and the nature of coverage provided there under. It is the underwriter's responsibility to determine the status, insurability and marketability of title within the context of the policy language. A policy of title insurance is the end product of the title insurance underwriting process, often achieved only after long hours of title coverage negotiation followed by equally long hours of off-record investigatory procedure. A policy of title insurance is a dual coverage policy providing both indemnity and defense costs. It is the written opinion of the issuing Company as to the validity of the title, backed by an agreement to make that opinion good in case it should prove to be mistaken and as a result thereof the insured should suffer a loss. A title insurance policy is a contract of indemnity whereby the insurer, in exchange for valuable consideration, agrees to indemnify the insured in a specific amount against loss sustained through defects in title wherein the latter has an insured interest. In return for the premium paid, the insured, in relying on that contract, is assured that the policy is backed by the full faith and integrity of the Company and substantial assets from which losses could be paid. If, after searching the title to the premises to be insured, the company thereafter, for whatever reason, fails to set forth in its commitment or policy something which is discoverable from a search of the public records (as same are defined in the policy) which is likely to effect the insured's decision to proceed with regard to the transaction, the company runs a considerable risk. Disclosure may be accomplished in any number of ways and different geographical practices may apply here. What is important to remember is that if someone involved in the title searching/examination/closing process fails to recognize and report a title defect or hazard, the underwriting process has been flawed and contractual obligations may thereafter be triggered and serious financial repercussions may follow. Even if the title company is ultimately exonerated of liability, defense costs may prove prohibitive.
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