The main reason behind Title insurance is that you and your mortgage lender want to make sure that the property is indeed yours and that no one else has any lien, claim or encumbrance on your property. A Title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim.
Title companies maintain “title plants” which contain information regarding property transfers and liens reaching back many years. Maintaining these plants, along with researching and examining title, is where most of your (one-time) premium dollars go. Title insurers work to identify and eliminate risk before issuing a title insurance policy, by identifying and eliminating potential risks, therefore, preventing future losses caused by title defects that may have been created in the past. For example, a person might claim to have a deed or a lease giving them ownership or the right to possess your property. Or perhaps a person could claim to hold an easement giving them a right of access across your land. Another person may claim they have a lien on your property securing repayment of a debt. There could be an IRS lien.
You should never purchase a property without Title insurance even if you know the owner. People go through life changes. They get divorced, change their wills, engage in transactions that limit the use of the property and have liens and judgments placed against them personally for various reasons. There may also be matters affecting the property that are not obvious or known, even by the existing owner. A Title search and examination seeks to uncover these defects.