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The November issue of Forbes magazine attacks the title insurance industry in an article titled “Inside America’s Richest Insurance Racket.” Its provocative lead line is, “Title insurance firms rake in $18 billion a year through a product that is outdated, largely unneeded – and protected by law.” As expected, this challenge has not gone unnoticed in real estate and legal circles. Many knowledgeable sources are concerned that the article’s author has attempted to demonize title insurance practices and premiums. Client Costs A few years ago one of my regular clients was buying apartment buildings and wanted to know why he couldn’t save money by avoiding title insurance, or at least limiting the amounts of coverage he was buying. One of the answers, of course, was that his lenders required title insurance on their mortgage loans. However, when he bought something without mortgage financing, why couldn’t he just rely on the sellers’ warranties of title – backed up by their deep pockets – and the title insurance they held from the time they purchased the property? Why not just pay for an updated title search and not the insurance? Also, even when a lender required title insurance, why should my client pay for any more insurance than required? For example, if the mortgage was only 70 percent of the purchase price, the lender usually required insurance only to the extent of that mortgage amount. Why, then, should my client buy insurance on the extra 30 percent? These questions were not outlandish, but as with any other insurance, savings usually have to be weighed against the protection you lose. Misleading Comments That brings me back to the Forbes article. It reveals a basic misunderstanding of the nature of title insurance and the title industry. Some of the author’s comments are misleading and feed into those misconceptions that many people, including my somewhat sophisticated client, have about title insurance. How about this excerpt: “A title insurance product protects the buyer in case the deed turns out to be defective, but the seller cannot be collared to refund the purchase price.” Most lawyers would immediately realize that title insurance involves much more than insuring against a defective “deed.” Obviously, title insurance ensures the buyer and the lender that a property is free and clear of title defects. In effect, a title company insures that its record search is accurate. But title insurance extends well beyond what might be called off-record risks, in addition to earlier mortgages, judgments, recorded easements and mechanics liens. The title insurance policy also insures against a host of other dangers to the integrity of title, including forged deeds anywhere in the line of title, lack of authority by signing parties, some probate and divorce issues that effect titles, mistakes in public records and under certain circumstances, title defects caused by neighbors’ encroachments and rights of adverse possession. How about this statement: “A homeowner refinancing a mortgage pays for new title insurance, despite the utter absence of any new risk in the deed.” This sentence again reveals the author’s misuse of the term “deed” when he obviously means “title.” However, the real problem with his comment is that he doesn’t seem to understand that title issues could occur between the placement of one mortgage and another. Also, he doesn’t mention that lower “re-issue rates” may be available. It is true that those events that could effect title between the placement of one mortgage and another are more limited than those that effect purchasing a property. But additional encumbrances could easily occur, including judgments, interim mortgages, a fraudulent title transfer or unexpected encumbrances, such as a mechanics’ lien or a lien for unpaid taxes. That’s the reason that refinancing lenders require a new loan policy. In addition, the secondary mortgage market will not purchase loans without that title insurance. Industry “Scams” Forbes’ attack also demonizes the business of title insurance. It catalogs some of the illegal activities and worst practices in the industry, including illegal inducements to “attain superior market share” and various “scams” to create sham companies to carry out illegal kickbacks. The article charges that consumers are overcharged for the risks taken by title companies, and that the top three title companies are “fat and thriving in an $18-billion-a-year-business that has quadrupled in 10 years.” Also: “Now only $74 of each policy goes to pay claims – that is, make homebuyers with defective deeds whole. That leaves a $1,373 spread for overhead and for profit.” A letter from the American Land Title Association to Steve Forbes attempts to answer these charges. It explains that unlike other types of insurance, title insurance is based on loss avoidance as opposed to loss assumption. The majority of the premium dollar goes toward preventing claims from occurring through the search and examination process, as opposed to paying claims. Therefore, expenses for title insurers are approximately 90 percent of the premium dollar, with only 5 percent going toward claims and the remaining 5 percent toward profit. That contrasts with expenses for property and casualty insurers, which are 25 percent of the premium dollar, so that 70 percent goes toward claims and the remaining 5 percent toward profit. Despite the common perception, the ALTA letter claims that title issues are found and corrected by title people in one out of every three residential real estate transactions. Also, over the past 25 years, the pre-tax profit margin for title insurers has only been approximately 1.3 percent, and on the basis of a cost-per-thousand dollars of liability, title insurance rates have actually decreased over the last 40 years. The ALTA admits that the title industry has experienced a boom cycle fueled by low interest rates and high refinance activity and that this success leads to “inaccurate conclusions unless one looks at the history of the real estate cycle.” The letter maintains that since title companies deal with a fixed cost structure, profits during booms play a critical role in providing a cushion that permits insurers to “ride out repeated collapses in real estate markets and pay claims that occur as many as 10 or 20 years after a policy is issued.” Despite inaccuracies in the Forbes article, it raises several critical issues about the industry that will continue to resonate among title and real estate executives and among lawyers. Even though the article’s author fails the test for fair reporting, I still don’t think I’m quite ready to cancel my Forbes subscription. The same Nov. 13 issue includes other articles I must first get around to reading. They include: “Divorce Dirty Tricks” (what angry spouses can get away with), “Gadgets We Love” (must-have toys for grown-ups), and “Great expectations about the guy who sold penis-enlargement pills.” HARRIS OMINSKY is with the law firm ofBlank Rome and is a former president of the board of the Pennsylvania Bar Institute.

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