Demystifying title insurance in the 21st century
This will not be an article about the merits of title insurance. After thirty years of counseling clients in complex commercial real estate transactions, I understand all too well its importance. To buy, lease or to finance commercial real estate without title insurance is akin to jumping from an airplane without a parachute.
The first policy of title insurance was issued in 1876 in Philadelphia, Pennsylvania. Today, title insurance is available in all 50 states and is frequently available in foreign countries. The need for title insurance first arose to help protect home buyers from being swindled by crooks who sold properties they didn’t own. Today, the industry is dominated by just a few underwriters collectively generating approximately $14 billion a year for a product that many people do not understand.
So why are there still many sophisticated real estate buyers and lenders who view title insurance as an unnecessary expense or even a scam?
First, one would think that in this age of digital technology, the condition of title to any property should be relatively easy to determine. Unfortunately, the digitizing of title records has been slow to evolve and is far from complete. Therefore, the title insurance process remains, to a certain extent, mired in the old days of physical records searches through the dusty books of time.
Second, the cost of title insurance is not uniform, but varies from state to state and at times, from transaction to transaction. In most states, rates are pre-determined and regulated by state government. Nonetheless, overcharging has been known to occur. The Pennsylvania Supreme Court has ruled that title companies which overcharge for title insurance may be liable to consumers under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, including penalties of up to triple the actual financial damages and attorney fees.
Another problem is that many consumers actually believe that title insurance is an insurance product, when it is actually a contract of indemnity. The insurer is not required to pay money if the issue can be solved another way. Therefore, the claims process is often complex and it is not uncommon for insurers to deny claims and litigate with their customers. Unlike life insurance, where the insurer may ask about the applicant’s health or require a medical examination prior to issuing the policy, title insurers will sometimes defer extensive underwriting of the transaction after a claim is made. This is principally because of the underwriting costs. The lower the monetary amount of the transaction, the lower the monetary premium which is charged for the title insurance policy.
Lastly, title insurance is distributed directly by insurers, through agents or “approved attorneys.” In many states, it is not uncommon for a law firm or a builder to have an affiliate which is a title agent. Most consumers do not understand the risks associated with each. However, the consumer sometimes comes upon a news story about kickbacks and other compensation illegally offered for the referral of title business by those in the real estate industry.
There has been more regulatory oversight of the industry of late and instances of kickbacks, scams and overcharging are far fewer. Nonetheless, at least for now, the title insurance process and its cost is unlikely to change and therefore customers will continue to question its necessity and legitimacy.
Neil Andrew Stein is a co-founder and principal of Kaplin Stewart in Blue Bell, PA.