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Tuesday, June 25, 2013

Don't Call it Title Insurance - Call it a Warranty

I recently read about yet another case of title insurance claim payouts being unfairly compared to other types of insurance, such as property and casualty. During a recent congressional house hearing on Qualified Mortgage, the president of the Center for Responsible Lending made a comment lamenting that, for every dollar spent on title insurance, 75 cents goes to commission and 10 cents to claims, while other forms of insurance pay 80 to 90 cents on the dollar for claims. These statistics are very misleading, and labeling title policies as "insurance" rather than a "warranty" is a big reason behind the misinformation.

When a lender or an individual buys a title policy, what they are really paying for is the effort that goes into ensuring that a piece of real estate has clean title, rather than insuring against title issues that might crop up in the future. This effort includes property searches for things such as outstanding liens that might cloud title, as well as work that is done to actively cure adverse conditions. A common example of curative work is getting lien releases from prior payoffs properly recorded in the county recorder's office.

A claim against a title policy is an outcome that is desirable to no one - neither homeowner, lender, nor underwriter. Everyone involved would prefer that the stress, expense, and aggravation of a claim be avoided by the work and due diligence that is done before a policy is issued.

A title policy is really a guarantee on the quality of the work that went into searching, documenting, and curing title defects. This is more similar to a warranty on a new car than to traditional insurance, such as a homeowner's policy. When someone purchases a new car, they are issued a warranty that guarantees, for a period of time, the quality of materials and workmanship that went into making the car. No car owner ever wishes for the inconvenience of unexpected car trouble, whether the repairs are covered under warranty or not. The ideal claims rate for a car warranty is zero. Title insurance should ideally have a very low claims rate as well.

Perhaps the best way to stop misinformation and unfair comparisons is by emphasizing to consumers and regulators that title premiums are mostly paying for the work that goes into ensuring clean title rather than insuring against the uncommon scenario of future claims. Using the term "warranty" rather than insurance might be one way to make this distinction clearer.