Why It Is Important When Title Shifts

There are three reasons why it is important when title shifts from seller to buyer—that is, when the buyer gets title.

It Affects Whether a Sale Has Occurred
First, a sale cannot occur without a shift in title. You will recall that a sale is defined by the Uniform Commercial Code (UCC) as a ―transfer of title from seller to buyer for a price.‖ Thus if there is no shift of title, there is no sale. And there are several consequences to there being no sale, one of which is—concerning a merchant-seller—that no implied warranty of merchantability arises. In a lease, of course, title remains with the lessor.

Creditors’ Rights
Second, title is important because it determines whether creditors may take the goods. If Creditor has a right to seize Debtor‘s goods to satisfy a judgment or because the parties have a security agreement (giving Creditor the right to repossess Debtor‘s goods), obviously it won‘t do at all for Creditor to seize goods when Debtor doesn‘t have title to them—they are somebody else‘s goods, and seizing them would be conversion, a tort (the civil equivalent of a theft offense).

Insurable Interest
Third, title is related to who has an insurable interest. A buyer cannot legally obtain insurance unless he has an insurable interest in the goods. Without an insurable interest, the insurance contract would be an illegal gambling contract. For example, if you attempt to take out insurance on a ship with which you have no connection, hoping to recover a large sum if it sinks, the courts will construe the contract as a wager you have made with the insurance company that the ship is not seaworthy, and they will refuse to enforce it if the ship should sink and you try to collect. Thus this question arises: under the UCC, at what point does the buyer acquire an insurable interest in the goods? Certainly a person has insurable interest if she has title, but the UCC allows a person to have insurable interest with less than full title. The argument here is often between two insurance companies, each denying that its insured had insurable interest as to make it liable.

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