Title Insurers, unlike property or casualty insurance companies, operate under the theory of risk elimination. Title companies spend a high percentage of their operating income each year collecting, storing, maintaining, and analyzing official records for information that affects the title to real property. Their technical experts are trained to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way, or other encumbrances on your title. Before closing your transaction, the title company will "clear" those encumbrances.
This theory is different from most other insurance, where, for example, rates and anticipated losses are based on actuarial studies, and premiums are pooled based on the assumption that a certain number of claims will be made. The distinction is important: title insurance premiums are paid to identify and eliminate potential risks and claims before they happen. For example, medical and casualty insurance premiums are paid to insure against an unpredictable future event, knowing risks exist, and claims will occur. Furthermore, title insurance involves a one-time premium, paid when you close the real estate transaction, while property, casualty, and medical insurance require renewal premiums.
Title companies aim to conduct a thorough search and evaluation of public records so that no claims will ever arise. Of course, this is impossible—we live in an imperfect world, where human error and changing legal interpretations make 100% risk elimination impossible. When claims arise, professional claims personnel are assigned to handle them according to the terms of the title insurance policy.
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