As children we probably spent some time in our civics classes learning about famous court cases that changed our country. Brown vs. Board of Education or Marbury vs. Madison are famous cases that had profound consequences for our country. However one very famous case in Pennsylvania also had very profound consequences for our country and the title industry. The court case Watson vs. Muirhead in 1868 helped to create the title insurance industry, here is how:
Charles Muirhead was a Philadelphia conveyancer. The term "conveyancer" applied at that time to a layman who made a business of searching land titles and reporting on their condition. A conveyancer's status in Pennsylvania closely paralleled the status of searchers, abstracters and examiners in other states. Watson, who was about to purchase real estate in Philadelphia, employed Muirhead to search and report on the title of the seller. A judgment by default was outstanding against the seller. Muirhead seemed to think the judgment did not constitute a lien upon the property in question, but rather than pass the title based solely upon his own opinion, he obtained a confirming opinion from an eminent Philadelphia lawyer. Thereupon Muirhead reported the title to Watson as being good, free and clear. Watson purchased the real estate. Later the judgment was held to encumber the real estate, and the property was sold at judicial sale to pay the judgment. Watson lost the property and sued Muirhead for the damage sustained. Here was a case where the purchaser lost his property and his entire investment therein because of an examiner's mistake of judgment.
The court held that the same rules of liability which applied to lawyers and doctors also applied to conveyancers. That meant that a conveyancer was not liable for his honest mistakes or errors in judgment except in cases of manifest negligence or failure to exercise reasonable professional skill, and that Muirhead was not liable under either circumstance. (Nice to know we are on the same professional level as doctors and lawyers, huh?)
As a practical matter, this case made it clear that a title examiner was not a "guarantor or insurer of titles" and that little, if any, financial responsibility existed behind the opinions of conveyancers and their counterparts in other states. This is still the standard that an abstractor or title examiner is held to today. To be liable for an error, the abstractor must fail to exercise reasonable professional skill or exhibit manifest negligence.
At the time of the Muirhead decision, Philadelphia was beginning preparations for the 1876 Centennial Exposition to celebrate the 100th year of our country. A real estate boom was in the making, but when the effect of the Muirhead decision became well known, the real estate market slumped. Normal real estate purchasers, speculators, and mortgage lenders became alarmed and politicians began to take notice.
In 1874, the Pennsylvania legislature passed an act "to provide for Incorporation and Regulation of Title Insurance Companies..." and on March 28, 1876 the first title insurance company was founded in Philadelphia under the name of Real Estate Title Insurance Company.
The organization of Real Estate Title Insurance Company triggered activity in the founding of title insurance companies in urban areas all over the country.
As you can see, without this decision in the Watson vs. Muirhead case, a different form of title assurance may have developed, one where an abstractor was financially liable for his work and had to have the financial wherewithal to cover losses. One can only imagine what a tangled web of methods to protect real estate titles might have developed without the Muirhead case. Think about that the next time someone asks you what is the most important court case in America!