Basically, title insurance provides protection against any problems that may arise out of the property. A title search should turn up any liens attached to the property, from, say, unpaid construction costs, owed taxes or even outstanding parking tickets. There may be unknown missing heirs that suddenly show up to claim the house or there could be disputes over a will.

This situation happened very recently. There was (is) an IRS lien on a property that the Purchaser’s representative and title insurance company both missed. Luckily for the purchaser, she was wise enough to purchase owner’s title insurance, so she is protected. Penny-wise, pound-foolish, I say. The cost of title insurance varies, but can be seemingly expensive at Closing; the cost of independently hiring an attorney and dealing with the IRS would be far more expensive.

Read more at the New York Times.

Update 10 December 2010: This is a video describing what Title Insurance is and why you may want to buy the Owner’s title insurance policy.