No law forces either a seller or a buyer to buy title insurance upon the sale of a property. However, a mortgage lender will require title insurance as a condition of obtaining a loan, so somebody is going to have to pick up the bill. Area custom usually determines who pays for the title insurance, but it is open to negotiation in the purchase contract.
Purpose of Title Insurance
Title insurance protects lenders and owners from claims against their title and/or interest in the property. When you buy a property, you and your lender want to make sure nobody can knock on your door a week or two later and inform you the house is really his. Even if he is wrong, you might be subject to a lawsuit and have to fight it. If you have title insurance, the insurance company will pay for your defense. If you lose the case, the company will pay you for the loss. If you don't have title insurance, you and your lender are on your own.
Types of Title Insurance
There are two basic policy types: a lender's policy and an owner's policy. The lender requires a title insurance policy as a condition of the mortgage. It's not going to give away tens and perhaps hundreds of thousands of dollars or more for a property that may not end up being yours. Likewise, you want a policy of your own because a lender's policy only protects the lender's investment. An owner's policy protects your equity. It is not legally required, but you'd be risking your down payment and future equity by not obtaining a policy. Title insurance protects you against things like errors or omissions in deeds, mistakes in records, forgery, undisclosed or missing heirs of prior owners, and missed tax and contractor liens.
Customs Vary Geographically
In the state of Texas, it's customary for the seller to pay for the title insurance. In California the practice varies between regions -- in Southern California the seller customarily pays; in Northern California it's the buyer. Your real estate agent can tell you what the local custom calls for in your area. In some places the seller pays for the lender's policy and the buyer pays for the owner's policy.
Everything Is Negotiable
Unless the law specifically requires the sellers or buyers to take certain actions in the property transaction process, then the action is not required and is subject to negotiation. Custom often dictates which parties pay for title insurance, home warranty, transfer tax and a host of other closing costs, but every one of these issues is, in fact, negotiable. In a seller's market, the buyer might offer to pay for everything just to present an attractive offer. In a buyer's market, on the other hand, the buyer might not be shy about asking the seller to pay all of these costs. The purchase contract is the place where these negotiations originate. The buyer specifies the costs she wants the seller to pay; the seller can accept the offer, reject the offer or counter it.