How your Title Insurance Dollar is Divided Up
Often misunderstood, title insurance is viewed by many home buyers
as an unusually high expense in comparison to other closing costs in
their real estate transaction. Lender costs are generally accepted, as
borrowers realize they are getting something valuable for their money,
a mortgage to purchase the property. City or county transfer taxes are
accepted, as they are a non-negotiable requirement of most real
property transfers. Buyers understand and pay for fire or hazard
insurance policies on their property, anticipating the policy will
reimburse them in case of a loss. Why then are title insurance
premiums, a one-time charge for a title policy lasting an indefinite
period of time, often considered not worthy of the cost?
Melanie and Bill Murphy, grudgingly paid out $950.00 to purchase
title insurance on a $250,000.00 home they were buying in Richmond,
Virginia. As required by their lender, the Murphys also purchased a
lender's policy to protect the mortgage holder's interest in the
property. Realizing that title insurance was a necessity, Melanie and
Bill wanted to have this protection, but the cost seemed high to them
in comparison to other closing costs. The Murphys understood the
$875.00 fee for fire insurance, and were comfortable paying that
charge. But Bill hadn't heard of any of his friends having to make a
title insurance claim, and he wondered how valuable that policy really
was. Bill had doubts that he was getting value for his dollar in
purchasing the title insurance policy.
Homebuyers may be confused as to where their title insurance dollar
goes. Looking at the statistics, title insurers paid out $487 million
in claims thru the 3rd quarter of 2004, $662 million in 2003 and $583
million in 2002. While the amount paid out in claims is rising every
year, historically title insurance claims represent between 4-6% of the
total revenue collected. It would seem logical that the higher
percentage of claims that an insurance company pays out, the better
value the insured is getting for his money. With title insurance the
opposite is true.
Title insurance is based on the theory of "loss prevention" which
means that the greatest amount of time, and money, is spent preventing
title problems from ever occurring in the first place. According to an
American Land Title Association (ALTA) survey, one out of every four
real estate transactions shows evidence of title problems. You may not
even be aware that a problem exists, as title companies make every
effort to ensure the property is free of all possible title problems
before issuing the policy of title insurance.
Preventing potential loss and subsequent claims is a highly
labor-intensive, and expensive, component of a title company's
operating budget. One reason is that in order to maintain current
records, which are critical to the accuracy of a title search, new
documents must be up-dated and indexed daily. Skilled and trained
researchers and underwriters must interpret the effects of these
documents on the title. Forged documents, one of the most common title
problems found, in addition to falsified documents, invalid deeds, and
incorrect property descriptions, are just some of the title issues
which must be examined. Other title risks include recording mistakes,
deed indexing errors, unpaid mechanics' liens, judgment liens, income
tax or property tax liens, undisclosed easements, claims by missing
heirs, and claims by ex-spouses.
The cost of a title insurance policy relative to the cost of a
property transaction is about one-half to one percent of the purchase
price. The premium price is based on five factors, starting with the
largest percentage and descending to the smallest.
- The cost of maintaining current title information on property local to that operation, the "title plant"
- The cost of searching and examining the title to subject properties
- The cost to resolve or clear defects to the title
- The claims costs covering title defects, including legal fees
- The allowance for a reasonable profit
The average expense ratio for a title company is greater than 90%,
while the expense ratio for personal property or casualty insurance is
less than 30%. Adding to the expense title companies incur is the need
to perform the majority of underwriting work in the state and county
where the property is located. Performing title searches on a national
level, which could be more cost effective, is generally not possible as
laws and customs vary from state to state.
Brian Harrison, a title researcher for a local title company, was
conducting a title search on a property in Plainview, New York. His
search revealed a federal tax lien against John and Roberta Simmons,
the Sellers, (and against the property), in the amount of $84,504.00.
The Simmons' assured Mr. Harrison that the lien had been paid off, and
they produced a faded copy of an IRS form titled "Release of Levy,"
which described the property and was signed by an IRS agent. Mr.
Harrison went ahead and authorized the closing of Mr. and Mrs. Simmons'
property sale, without listing the tax lien as an exception of the new
owner's policy of title insurance. Shortly thereafter, the IRS
threatened to execute against the property. The "Release of Levy"
document which John and Roberta Simmons produced was in reality only a
promise from the IRS to forego collection efforts as long as the
Simmons made installment payments on the outstanding lien balance of
$41, 572.00. Once the sale was finalized, the Simmons' stopped making
payments to the IRS on the tax lien. The title company was obligated to
pay the full amount owing to the IRS to obtain the correct document,
called a "Certificate of Release of Federal Tax Lien." which cleared
the lien from the property.
A unique benefit of title insurance is that its coverage can extend
long after an owner has sold the property. This coverage was tested in
the case of Mr. and Mrs. Stark of Toledo, Ohio. A judgment lien in the
amount of $253,513.00 was placed on the Stark's property and was still
in place when Mr. Stark deeded the house to his wife. Mrs. Stark sold
the home a short time later to Richard and Nancy Prouder.
in the home several years, the Prouders sold the house to Henry and
Edwina Miller. Nearly eight years passed before the bank who had filed
the original lien started enforcement of it's claim against Mr. Stark.
The bank filed a lawsuit against the Millers, as the current owners of
the home, and sought to force a sale of the house. Henry and Edwina
Miller contacted their title company and learned that the bank had the
right, as a judgment creditor, to file their lawsuit against the
Millers, as the lien against Mr. Stark was filed during the time Mr.
Stark owned the home. The title company representing Henry and Edwina
Miller determined that the judgment lien had gone undetected because it
was originally indexed in the local computerized title plant under the
name "Stank," instead of "Stark." The title company insuring Henry and
Edwina Miller negotiated a settlement with the bank, paying out
$147,500 for an assignment of the judgment lien. Knowing that the prior
owners, Richard and Nancy Prouder also had held title insurance, the
Miller's title company made a claim against the Prouders on the
warranties given when they sold the home. The Prouders title company
reimbursed the Miller's title company in the amount of $145,000.00.
Although you may not be aware of the financial benefits of your
title insurance policy, when a title claim is made, it is usually very
significant. In may be large in terms of dollar loss, or critical in
terms of property loss. Whether a claim is valid or not, your title
insurance policy will cover all the legal expenses necessary to defend
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