Your title insurance policy covers you more than you may realize

Even the most diligent of title searches cannot uncover 100 percent of title defects 100 percent of the time. Title insurance not only covers mistakes made during a title search, it covers many more issues that a title search may not reveal. 

Sometimes tardy record keeping at the government clerk's office is to blame. Other times, it may be a forged document. No matter what the issue may be, without title insurance the homeowner will be on the hook for any costs to defend title as well as any losses incurred.

While it's true that the title insurance claims rate is somewhere around 5 percent – relatively low in comparison to other forms of insurance – this number can be somewhat misleading. That's because a lot goes on behind the scenes at the title company to ensure a smooth, stress-free closing. The behind-the-scenes work doesn't always show up in the statistics.

When a title cloud is detected prior to a real estate closing, the title company-to-insure contacts the title company who handled the original settlement on behalf of the seller. In our experience, this occurs in about one out of every 10 transactions. When it does, we're usually able to resolve the issue without having to alert the seller or report a claim.

Keeping in mind that an owner's title policy ranges on average around $1,100 for a house in the District of Columbia, and the cost of legal fees to clear title could run into the tens of thousands of dollars, it just seems like good fiscal sense to purchase the added protection.

Average loss on a DC title policy is $639

A recent Demotech study may reveal yet another reason for homebuyers to obtain owner’s title insurance – especially if you are buying a home in the District of Columbia.

Title insurance companies take a loss of $215 on average in Maryland and $165 in Virginia, according to the study. In the District of Columbia the average loss is $639 for every title policy issued.

Put another way, if the homebuyer had not obtained owner’s title insurance, these figures possibly represent the average amount of loss suffered directly by the homebuyer.

Among the three jurisdictions, title insurers of District properties suffer the highest loss per policy issued. In fact the District of Columbia has the highest loss rate in the country, which may explain why District title insurance premiums remain among the highest in the country.

On average, a DC homebuyer pays $2,800 in title insurance premiums. Of the $2,800 in premium, $639 is paid out in claims and losses suffered by the title insurance underwriter.

Below is a more detailed breakdown, by jurisdiction and title insurance underwriter, of the loss ratios:

Maryland

  • First American wrote 25 percent of the policies and paid $22 million in losses (48 percent of the state total; $409 loss per policy).

  • Chicago (15 percent), Fidelity (13 percent), Old Republic (13 percent) and Stewart (13 percent) rounded out the top 5 in policies written.

  • Chicago stood out from that pack in losses paid with $10.5 million — 23 percent of the losses in the state.

  • Overall, Maryland had a $215 loss per policy.

  • 85 percent of the policies were from non-affiliated agents; nearly 10 percent came from underwriter-affiliated and 5 percent came from direct shops.

Washington, DC

  • 26,211 policies were written and split among 16 different underwriters.

  • First American led the way with 51 percent, followed by Chicago with 11 percent and Stewart with 11 percent.

  • Paid losses piled up to nearly $17 million — $639 loss per policy.

  • First American led the way there too with 65 percent of the total ($11 million, $817 loss per policy). They were followed by Chicago at 14 percent ($2.4 million, $859 loss per policy) and Stewart at 13 percent ($2.2 million, $803 loss per policy)

  • 87 percent of policies come from non-affiliated agents; 7 percent from underwriter-affiliated agents and 6 percent from direct agents.

Virginia

  • 321,450 policies written statewide.

  • First American wrote 24 percent, followed by Fidelity with 21 percent, Chicago with 15 percent and Stewart with 14 percent.

  • Statewide, there were $53 million paid losses — a $165 loss per policy.

  • First American paid 41 percent of the total — $22 million, a $276 loss per policy. Fidelity (20 percent) and Chicago (13 percent) combined for 33 percent, or more than $17 million.

  • Entitle was 12th in policies written with 0.39 percent of the market but paid $2 million in losses, or 4 percent of the total — a $1,605 loss per policy.

  • 90 percent of policies were written by non-affiliated agents; 6 percent came from underwriter-affiliated agents and 5 percent from direct shops.

Owner’s title insurance: Case of forgery after infidelity

Part 6 of a series

Fraud is a common cause of title claims, and it's practically impossible to detect in many cases because there is no way for the title agent to know about the fraud until after the fact.

As we've discussed before, title insurance is about "risk elimination" of title problems arising from past events and not "risk assumption" of future events. If a title claim arises down the road, as was the case for the homebuyers in this story involving a forged power of attorney document, the owner's title insurance policy kicks in.

In 2001, Karen and Kirk purchased a home together and took title as joint tenants. In 2005, Karen moved out after learning of Kirk’s infidelity. In 2006, Kirk showed up at the closing table and presented the settlement attorney with a specific, full authority power of attorney signed by Karen and properly executed and sealed by a Notary Public.

Using the power of attorney, Kirk proceeded to sign the closing documents for his self and on behalf of Karen; including the deed and a disbursement authorization that directed all the sales proceeds be wired to his personal savings account.

At the closing, the homebuyers elected to waive owner’s title insurance coverage.

In 2011, the homebuyers were served with a lawsuit brought by Karen and her attorney claiming her interest in the property.

As it turned out, Karen’s signature on the power of attorney document presented at the 2006 closing had been forged and the Notary Public was complicit in the fraud.

As of 2012, the homebuyers have spent approximately $15,000 in attorney fees defending title to their property.

Had they elected to purchase owner’s title insurance coverage at the time of closing, they would have paid $850 and the title insurance underwriter would be paying the attorney fees to defend title.

If a homebuyer refuses to purchase an owner's title insurance policy and a title cloud arises down the road as in the story about Karen and Kirk, the homebuyer (new owners) would then be on the hook for any legal expenses. Without an owner's title insurance policy, money invested to buy the property or make improvements could also be lost.

Why does owner's title insurance get a bad rap?

Google "owner’s title insurance," and you will find scores of blogs and other publications scorning this misunderstood insurance product. Frequently, at the settlement table, we hear homebuyers opine that title insurance is a "rip-off" and not worth the cost.

Most of these comments stem from a deep misunderstanding of the product and, too often, are merely a regurgitation of the opinions that predominate the conventional wisdom.

While owner’s title insurance is optional to a homebuyer, we rarely hear homebuyers bemoan the fact that they are required to obtain homeowner’s insurance. The average owner’s title insurance premium paid by homebuyers to cover a Bethesda, MD property costs $962 as a one-time premium without a deductible, while homeowner’s insurance would cost that same homebuyer $879 annually with a $500 deductible.

In other words, over a period of ten years of homeownership, that same homebuyer/homeowner would pay $962 for owner’s title insurance but pay $8,790 for homeowner’s insurance.

Yet, rarely do we hear complaints about the required homeowner’s insurance coverage. But why?

Here are the stats that give rise to the negative chatter over owner’s title insurance...

According to the Insurance Information Institute, 6 percent of insured homes had a claim against the homeowner’s insurance policy compared to less than 1 percent of title insurance policy holders. Moreover, in 2009 the homeowner’s insurance industry paid out roughly $0.87 for every $1 in premium; whereas, the title insurance industry paid out only $0.05 for every $1 in premium.

These statistics on their face – without an understanding of title insurance as a "risk elimination" line of indemnity insurance – raise eyebrows.

Further, these statistics would lead one to assume that the title insurance industry is a far more profitable industry than the homeowner’s insurance industry when, in fact, the opposite is true. As of 2008, the top three title insurance underwriters lost money while the top three homeowner’s insurance companies were profitable.

But here is the rub...

Title insurance is not homeowner’s insurance. Title insurance is about "risk elimination" of title problems arising from past events and not "risk assumption" of future events.

According to the American Land Title Association, 25% of properties have a title defect that requires clearing and curing title prior to closing and, in most cases, this work is performed and cured without the parties to the transaction ever knowing about it.

The cost for this work is paid with title insurance premiums; both to the title agent in the form of commissions and to third-party service providers for reviewing and clearing title. Title insurance premiums also pay for the cost of maintaining accuracy of title plants and other title records.

So, in addition to paying out claims for human error or fraud by a seller or prior homeowner, the title insurance premium also covers work performed for eliminating the risk of a title defect.

Before the advent of title insurance, homebuyers hired and paid attorneys to review title, cure title, and issue an attorney’s opinion title. If the attorney erred, the homeowner could make a claim against the attorney – assuming the attorney had not since been disbarred for malpractice.

In this modern world, the homeowner has the option of purchasing owner’s title insurance for which they can rely on the title insurance underwriter (or, in the event of a defalcation or bankruptcy, it’s regulating state insurance commission) to make good on a claim.

Owner’s title insurance: Seller fraud and HELOCs

Part 5 of a series

During our 16 years of business Federal Title has, on three separate transactions, paid out claims on owner’s title insurance policies due to a seller committing fraud by securing a home equity line of credit (HELOC) immediately prior to closing.

These claims amounted to a total of $280,000.

Here’s how it works.

A fraudulent seller recognizes that the public records are usually 2-3 months behind in indexing liens or other matters of public record. Thus, he or she applies for a home equity line of credit with a mortgage lender a few weeks prior to closing, and that loan is secured by a deed of trust (mortgage lien) against the subject property.

A title examiner for the title company completes the search prior to closing but the search does not reveal this HELOC mortgage/lien because the clerk’s office for the respective county/city has not yet indexed the HELOC for public view.

In other words, there is no way for the title examiner or the settlement company to know about the HELOC but for the seller disclosing the lien.

In the "real life" instances I cite above, each of the fraudulent sellers drew on the HELOC, took the cash, and walked away from the settlement table. Months later, after the sellers defaulted on the HELOC by failing to make the required monthly payments, the new owners received a notice of foreclosure from the HELOC mortgage lender threatening to sell the property at a foreclosure sale.

Fortunately for all of these new owners, they each obtained owner’s title insurance coverage and the HELOC was paid off and released by the title insurance company.

What if these new owners had waived owner’s title insurance coverage?

Unfortunately, without owner’s title insurance coverage, the new owners would have had no recourse except to pursue an action against the fraudulent seller. In order to save their property, the new owners would have been required to pay off the HELOC lien.

Why wouldn’t the new owners have a cause of action against the title company?

Without owner’s title insurance coverage, a title company provides no assurances of title other than the matters appearing of record up to and at the time of closing. Since this HELOC did not appear as a matter of public record up to or at the time of closing, the title company would not be liable for the seller’s fraudulent action.

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Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.