The system of title insurance came into use as a remedy for the previously described situation. Like all other insurance it is a distribution of loss among all insured. Title companies are organizations authorized by law to examine and insure titles. They charge a fee or premium for their service. This premium is usually based upon the value of the property. It is an amount which covers not only the expense of the examination but an additional amount which is placed in a general fund to cover losses insured against. The company makes a careful examination of the title. If it is satisfied that there are no apparent defects in the title, it insures against any loss. Should there later be a loss, by reason of forgery or any other defect, arising prior to the insurance, the title company pays the loss. This in brief is the theory of title insurance.

In seeking title insurance the person about to acquire the title or some interest in the real property first applies to the title company. He agrees to pay a certain fee for examination of the title. The title company on its part obligates itself to make an examination of the title and to insure against undiscovered defects; it does not agree to insure against defects and encumbrances which may appear from the examination.

The applicant should therefore insist that he be given a "report of title" after the examination is completed. This is a statement setting forth a description of the property, the name of the record owner and a detailed list of all objections to the title, i.e. encumbrances and defects found upon the records. The reason for having this report is simple. It enables the applicant to know the exact condition of the title. If he is a purchaser, his contract stipulates that he shall take title subject to certain encumbrances. The report sets forth all the encumbrances found on the records. The purchaser demands that the seller dispose of all those not agreed upon in the contract, before delivering a deed. Or if the applicant had agreed to make a mortgage loan he insists that the owner render his title free and clear before the loan is made.

After the objections not agreed upon have been removed, the title is closed, and the instruments passing title are delivered and recorded. The title company now prepares to issue its policy of title insurance. There may of course still be encumbrances on the property, which have been agreed upon. For example, the transaction may be a sale of the property subject to one or more mortgages. The policy should be carefully examined to see that the property is properly insured without any exceptions other than those agreed upon.