Frequently asked questions

1. What types of lenders use title insurance?

A range of lenders use title insurance to manage property-related risks, including: major trading banks, non-banks, building societies, and wholesale funders.

2. How does title insurance compare to lender mortgage insurance?

Lenders mortgage insurance (LMI) and title insurance are not the same, but they can be complementary to each other.

LMI protects lenders against loss if a borrower fails to repay the loan. Title insurance provides lenders with a guarantee that its mortgage is valid, enforceable and not subject to any prior interests or encumbrances. LMI providers can potentially deny a LMI claim from a lender if there is a challenge to the enforceability of the lender’s mortgage claim. Title insurance can mitigate this concern as it provides a lender with comfort knowing that it insures the validity and enforceability of the lender’s mortgage security.

3. What are the origins of title insurance?

While title insurance (known as property risk insurance) is a relatively new concept in Australia and New Zealand, it has its origins in the period following the American Civil War (1861–1865). Prior to the Civil War, title to land was transferred using the general law or ‘old system’ process. The old system process required a chain of documents going as far back as possible to prove good title, free of defects and encumbrances.

Consequently, it was often difficult to prove good title. A property owner or lender who suffered losses had no recourse against their lawyer, as the lawyer had not been (arguably) negligent. The property owner or lender could therefore not claim against the lawyer’s professional indemnity insurance.

To overcome this problem, lawyers devised title insurance as a way of providing their property owner and lender clients with a no-fault, first-party insurance policy that did not depend on lawyer negligence for a recovery – it was simply an insured loss.

Title insurance companies were formed in order to protect the interests of property owners and lenders. It is similar to the Torrens title land system in that good title was guaranteed by private enterprise instead of government. However, unlike the Torrens title system, title insurance goes further by underwriting risks associated with property due diligence and the conveyancing process.

The use of title insurance expanded rapidly in the United States at the end of World War II to accommodate the needs of returning service personnel. The emergence of securitisation and the secondary mortgage market in the 1970s and 1980s saw title insurance adopted as a matter of necessity. It is now virtually impossible to obtain a mortgage in the United States, or have it securitised, unless the lender has the benefit of a title insurance policy.