The issuance of title insurance began after the 1868 case of Watson v. Muirhead was filed in Pennsylvania. Muirhead was a conveyancer who had searched and abstracted a title for Watson, who was purchasing a parcel of real property.
Muirhead found a lien on the title during his search. He supplied a copy of the lien to an attorney for a legal opinion. The attorney advised the judgment was not a valid lien. With this assurance, the purchaser completed the transaction.
Shortly thereafter, the property was sold at a Sherriff's sale in order to pay off the lien. Watson sued Muirhead to recover his losses. The Pennsylvania Supreme Court did acknowledge the lien and subsequent Sherriff's sale was indeed lawful, but dismissed the case.
The court determined the conveyancer was not liable for misinformation since the legal standard in those days for a conveyancer to be held liable, required the buyer to prove the conveyancer was negligent or failed to act with due care. Since the conveyancer had relied upon an attorney's opinion it was determined the conveyancer had used due care, even though the opinion was incorrect.
Watson, an innocent purchaser who had suffered financial damages because of the encumbrances on his title, had no recourse. The decision demonstrated the existing conveyancing system could not provide total assurance to purchasers of real property.
As a result, the Pennsylvania legislature passed an act, "…to provide for the incorporation and regulation of title insurance companies." The first title company was founded in Philadelphia in 1876. This new type of insurance provided:
- Responsibility without proof of negligence;
- Financial protection through a reduction of the risk of insolvency; and
- The assumption of risks beyond those disclosed in the public records (for which the conveyancer was not liable).
Since then, the title insurance industry has become an essential component in real estate transactions in this country.