In the purchase of a home, closing costs are generally burdensome, and the cost of title insurance can be one of the largest of them. Banks giving mortgages to buyers routinely require title insurance as a condition of the loan; as painful as it may be to pay the premium, the bank may be doing the buyer a favor.
Liens and other encumbrances against title such as a mortgage are entered of record by the Recorder of Deeds of the county in which the real estate is located; and when the buyer of a property engages a title company to insure title, it searches the indexes in the Recorder of Deeds office and provides the buyer with a title report which lists all liens and encumbrances against the property being purchased. When all of the prior liens and encumbrances have been satisfied or removed, the title company insures the buyer and the new mortgage lender that title is unencumbered.
The people who enter data of record are fallible; and though it may be rare, there are instances where liens are improperly indexed. The title company searching the record may be unable to determine that a prior lien exists because it is misindexed; so, the buyer blissfully proceeds to settlement only to find some time afterward that there is a prior lien or encumbrance that has never been discharged against his title.
Obviously, such a result could be devastating, and who prevails – – i.e., the prior lien-holder or the buyer – – is not necessarily clear in Pennsylvania. Neither has done anything wrong (and the Recorder of Deeds who made the mistake generally is granted immunity from liability for misindexing), but someone is going to suffer the consequences. Either the holder of the prior lien (say a previous mortgage lender) has lost its security because its lien is void (and the old owner may be somewhere in North Dakota and broke); or the new owner, the buyer, is going to have to satisfy the misindexed prior lien in addition to the purchase price he has already paid to the prior owner (the guy in North Dakota).
If the buyer has made a reasonable search of the indexes in the Recorder of Deeds office before buying, he or she will probably prevail in Pennsylvania (though the burden will be on the buyer to prove he was diligent). Because neither the buyer nor the prior lienholder is really culpable in this circumstance, the rule varies from state to state; it is a tough call for a court to find against either since neither is a wrongdoer. (Where misindexing has occurred, New York and Maryland courts have found for the buyers while Florida and Washington D.C. courts have found for the prior lienholders.) If the new owner has purchased title insurance, he or she can roll over and not lose a moment’s sleep. The title company will step in and deal with any litigation; and in the end if the prior lien-holder should prevail, the title company, not the buyer, will have to bear the expense of satisfying the lien.
At that point the burdensome premium the buyer paid at settlement will look like a bargain!
— Ken Butera