Saturday, November 17, 2012

Title Insurance is "insuring pig iron underwater...with a rust exclusion"

I keep running across the same figure that only 5% of the premiums for title insurance are allocated to paying losses.  Far far less than any other form of insurance.

I just found this great article from Mortgage News Daily by Rob Chrisman dated August 3, 2011

Perspective on Rejected Title Insurance Claims

Part of his article reads:

Monday the commentary discussed claims with title companies. "I just wanted to comment on the subject of claims with the title companies. I can tell you I had a personal claim against a national title company that missed some back taxes owed by the previous owner on a short sale. The county contacted me and said I was responsible for these back taxes, but that it was the title company's fault and I should contact it. Even though it was a clear case of the company being at fault the claim was denied. I had to eventually hire an attorney and threaten a lawsuit before getting them to settle. It took a lot of time and resources to get it to admit fault even though I had clear documentation from the county etc. I just thought I would share as this seems to back up what you are hearing."

One reader wrote, "As far as I can tell, from over 20 years of experience in this business, rejection of virtually all title claims by the insurer has been standard operating procedure. This is not a new phenomenon. In fact, a similarly jaded former Chairman of a small Midwestern thrift (long since deceased) once was heard to say that title insurance is "insuring pig iron underwater...with a rust exclusion". The economics of title insurance are vastly different from ordinary insurance with upwards of 80% of all premiums being paid to title agents merely for delivering the business. Only about 5% of all premium income is allocated to paying losses (the rest is administrative expense-such as lawyers to fight claims). The economics of casualty insurance, on the other hand, are reversed. There is rarely accountability between the purchaser of title insurance and the person making a claim (consider in many states the seller buys the insurance), but it's the buyer (or lender) who will have to pursue the claim. As a result, there is no need to have a good claims paying history since the buyers of their insurance never have to deal with a claim denial. In fact, if you think about it, if the title company does a proper search and knows the applicable law, the risk of loss should be zero. It is not as if a random occurrence like a tornado can hit your title and cause it to change. Title insurers are really just insuring their own negligence (and malfeasance) on the front end. Title losses were covered up by rising real estate values generally during the first half of the 2000's. Now, mortgage holders are seeking to hold title insurers liable for title losses whenever possible, many of which are really the result of fraud. Title claim volume has no doubt increased, so title insurers are just continuing their business model (of not paying claims easily) in more visible fashion."