Is Title Insurance a Rip Off?

According to some critics, millions of Americans spend billions of dollars on a product that few understand or directly benefit from: title insurance.

Last year, more than a dozen title insurers settled with regulators for tens of millions of dollars over industry sales practices. Just this week, meanwhile, the California Insurance Commissioner opened hearings on how to change an industry it calls a “dysfunctional market in which consumers pay too much for coverage.”

At its best, title insurance serves an important function, according to Nelson Lipshutz, author of “The Regulatory Economics of Title Insurance” and spokesman for the American Land Title Association (ALTA).

Say you buy a home and 10 years later someone turns up with a legitimate claim that they never sold the property. Title insurance protects you against that, and other undiscovered liens or claims, easements, and flawed deeds.

“It makes it possible to trade property with confidence,” said Lipshutz.

The problem with title insurance

So what’s the problem? It’s the way the insurance is sold, according to Birny Birnbaum, a former chief economist of the Texas Department of Insurance who is currently with the Texas Center for Social Justice.

Legally, borrowers are free to buy from any title insurer they choose. Practically, however, the insurer is likely to be chosen by the real estate agent, mortgage broker or lender — and those parties are marketed to heavily by title insurers.

Granted, many of the industry’s marketing efforts are legal, according to Birnbaum. The insurers pay for marketing costs, they provide free market analysis, and provide mailing lists and other services.

Others, however, are illegal, such as:

• kickbacks
• free vacations
• free use of office space and equipment

Most consumers know so little about title insurance that “they don’t know who their insurer will be until they sit down at the closing table,” said ALTA spokeswoman Michelle Sweet.

To the anxious home buyer, the cost of title insurance is negligible, typically 0.5 percent or so of the purchase price of the house. “You just want to get into the house,” said Birnbaum. “It’s, say, $1,500. If you squawk, it will hold up the closing. You may lose the house.”

But that’s money home buyers wouldn’t need to spend, some say, if the industry were more transparent.

Making a mint through title insurance

The profits involved appear significant. Nationwide, only a tiny percentage of premiums are returned to consumers to settle claims.

In 2003, according to ALTA, the industry paid out about $662 million. That’s just over 4 percent of the $15.7 billion taken in as premiums. Auto insurers, in contrast, paid out 75 percent of collected premiums, according to the American Insurance Association (AIA).

But that’s the wrong way to think about title insurance, according to Lipshutz.

“Title insurance is loss prevention insurance,” he said. “Like boiler insurance (where much of the premium dollar is spent on inspections and risk analysis), most of the premium money is spent to prevent later losses. Life and auto insurance are intended to pay off later losses.”

But even with boiler insurance, about 25 percent of premiums is paid out in claims, according to Eric Goldberg, general council of the AIA.

Birnbaum says insurers exaggerate the work involved in researching and cleaning up titles. Most records are now automated. He claims that 30 percent to 50 percent of each premium dollar goes to selling and marketing its products.

Not everyone agrees.

Craig Page, VP and council for the California Land Title Association, calls Birnbaum’s math “laughable.” He says that searching and repairing titles is “much more expensive and time-intensive” than critics claim, that “not all property records are automated,” and that there is “a lot of up-front work taken for granted.”

ALTA does not track marketing costs so it’s difficult to determine if consumers are paying for waste or for quality of work.

Should Florida follow the Iowa alternative?

Iowa, the only state that bans title insurance sales, can offer some clues to answer that question. Its alternative to title insurance seems to offer big savings to consumers.

Iowa has its own state-run Title Guaranty Program. It costs just $110 for up to $500,000 in coverage. Added to the bill in Iowa is the cost ($150) of the “abstractor,” who researches the property, and a lawyer ($125), who signs off on the findings. The total cost is usually about $400.

Outside Iowa, according to the Iowa Bar Association, the national average is $5.15 per $1,000, or nearly $1,100 for the median home.

Lipshutz disputes the cost savings in Iowa. He says it takes longer in Iowa to get the title guaranty and because of that, mortgage lenders set their lock-in rates higher, costing home buyers an extra two tenths of a percent on an average mortgage.

Iowans beg to differ.

Jim Carney, an Iowa lawyer who has lobbied against title insurance for years, says, “We can close just as quickly.”

Lloyd Ogle, director of the Iowa Title Guaranty Program, says the system results in extremely clean titles and a very low incidence of litigation resulting from title defects. But the biggest attraction is the savings. “You won’t find anywhere in the country with lower costs,” he says.

If you took out title insurance with your Florida home loan, you should be paying $1,107 for $180,000 of coverage. Only you can decide if this is worth it or not.