The first real estate title insurance company was organized in Philadelphia in 1876 to protect against loss arising from "clouds" or problems in the historical chain of title for a given property. Title insurance basically amounts to indemnity insurance against financial loss arising as a result of defects in title to real property. Its main function is to protect both the owner and lender in the event that a challenge to title or some other title-related defect is discovered after real property has been conveyed.
In short, before you purchased your home and the land on which it is built, it may have gone through several ownership changes. At any point in the history of that property, there may be a "weak link" in the chain of title that could result in problems for the current owner. Examples could include a forged signature or false identity in a previous sale, errors in previous recordings and title searches, or unpaid liens and taxes. Title insurance provides protection to the insured party against any claims and legal fees that result from such a circumstance.