Title insurance premiums: Who's getting paid?

The cost of title insurance continues to increase. In just the last five years, due to a massive influx of title claims relating to the nation’s housing crisis, title insurance premiums have increased in Maryland, the District of Columbia and Virginia by an average of 15 percent.

The larger premiums, reflected on the HUD-1 Settlement Statement, have become more eye-popping to the homebuyer and, as a result, they have become the subject of much discussion of closing costs in the news.

Let’s talk about who is pocketing those premiums and why? It’s no secret that a title agent or settlement company keeps anywhere from 70 percent to 85 percent of the premium as a commission with the balance paid over to the underwriter (i.e., First American, Chicago Title, Stewart Title, Fidelity National, et. al.).

Critics, in the name of consumer protection, argue that the underwriter’s willingness to pay such high commission splits and retain so little is proof that the title insurance industry is over-priced.

The underwriter is willing to pay over the majority of the title insurance premium as a commission to the agent because it’s the agent who handles nearly all of the title underwriting duties in addition to taking on most of the liability. That is, the title agent is charged with the duties of ordering and reviewing title, certifying real property taxes and issuing the title commitments and policies to the respective homebuyers and lenders.

More importantly, the agency agreement between the title agent and the underwriter shifts the liability for errors and omissions to the title agent. In other words, except for governmental recording errors or matters adverse to title not appearing as a matter of public record, it is the title agent or settlement company that ultimately pays for the title insurance claim.

Looking at this from another perspective, if not for title insurance, the homebuyer would pay an amount comparable to the cost of the title insurance premium in the form an Attorney’s Opinion/Title Guaranty Letter and/or higher settlement fees in order to account for the liability resting with the title agent.

So, to those critics of title insurance, I would agree that title insurance is pricey but not "over-priced" compared to other alternatives. After all, if there are alternative products to title insurance that are superior in terms of both affordability and quality, then I believe such products will be borne out by the marketplace.

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