Title insurance is bought once at closing and protects against problems that arose before the purchase rather than events afterward. It exists because of how the United States records property ownership.
The recording system does not guarantee title
American land records are maintained by counties, which record documents as they are presented without adjudicating whether the underlying claim is valid.
A recorded deed is evidence of a transfer, not proof that the seller had the right to make it. The record shows what was filed, not what is true.
Some countries instead operate registration systems where the state guarantees the registered owner's title. Under that model title insurance is largely unnecessary.
Searches find most problems but not all
A title search examines the chain of ownership and looks for liens, judgments, easements and unpaid taxes attached to the property.
Many defects cannot be discovered this way. Forged signatures, undisclosed heirs, an owner who lacked capacity, or a deed recorded in the wrong name may leave no trace.
Errors in indexing and legal descriptions are also common enough to matter, and a document filed against a misspelled name may never surface in a search.
The policy covers the undiscoverable residue
Because a search cannot be exhaustive, the insurer accepts the remaining risk in exchange for a one-time premium paid at closing.
If a covered claim emerges, the insurer defends the title in court and pays a loss up to the policy amount, which is generally the purchase price.
Exceptions listed in the policy are as important as the coverage, since anything the search did find is typically excluded unless it is cleared before closing.
Lender and owner policies are separate
A lender requires its own policy protecting its security interest, and that coverage declines as the loan balance is paid down.
An owner's policy is optional in most transactions and protects the buyer's equity for as long as they hold an interest in the property.
Buying only the lender's policy leaves the purchaser's own stake uninsured, which is a distinction that is easy to miss among closing documents.
Prevention is where the industry spends
Unlike most insurance lines, the bulk of the work happens before the policy is issued, in searching records and clearing defects found.
Claims are comparatively infrequent as a result, and much of the premium funds the search and curative work rather than expected losses.
Rates and required disclosures are regulated at the state level and vary considerably, so who pays for which policy is a matter of local custom and negotiation rather than a fixed rule.