Naples Daily News June 20, 2004

Robert Bruss: The pros and cons of title insurance

By ROBERT J. BRUSS, Inman News Features
June 20, 2004

"Title insurance is a big waste of money. What a racket!" That's what a friend who recently refinanced his home mortgage told me as he complained about paying more than $1,000 for title insurance.

To agree with him and hopefully make him feel better, I then pointed out that title insurers pay out less than 10 percent of the premiums they collect for title policy claims. "You mean they earn 90 percent profit?" he asked.

Although it's virtually impossible to determine exact net title industry profits, I then felt obligated to point out the biggest expense for title insurers is researching property titles before insuring them. Although title insurance is very profitable for the insurers, they probably net somewhere around 10 percent of premiums collected.

When I ask my college real estate law students if they have ever heard of any property owner having a title insurance claim, each semester I receive blank stares. Having been a real estate investor since 1967, I have yet to have a title insurance claim or even hear of one (except by reading the few title insurance court decisions).

The reason is title insurers try to minimize claims by carefully researching titles before issuing title policies. However, occasionally legitimate title insurance claims arise and title insurers then must pay their insureds.

As a percentage of the cost of real property, title insurance premiums probably average about one percent. However, when a title loss occurs, it is usually a big loss.

The largest cause of title insurance policy claims is forged signatures. Even the world's greatest title searcher or abstractor usually can't predict when a forged signature will appear in the chain of title.

The most common cause of forged signatures involves husband and wife disputes where one spouse forges the other's signature. Other forgery situations involve mortgage payoffs when the loan really wasn't paid in full.

I used to invite the local manager for a major title insurance company to speak to my college real estate classes. He regaled us for hours with stories of situations involving title insurance claims and why every property owner and mortgage lender needs title insurance.

Before explaining how to save on title insurance premiums, it is important to understand the two types of title insurance:

1. Lender's title insurance. Every institutional mortgage lender insists on receiving a lender's title insurance policy paid for by the borrower (or in some cases by the property seller). These lender title policies protect lenders from insured title risk loss. But they offer zero protection for the borrower.

Lender's title insurance policies protect against title risk losses from many causes, such as forged signatures, recording errors, deed indexing mistakes, unpaid property taxes and other recorded liens, improper foreclosures, title search errors, undisclosed easements, and even title claims by heirs and ex-spouses.

Property surveys can usually be insured too.

2. Owner's title insurance. For a one-time title insurance premium, the property owner's marketable title equity can be insured as long as that owner or heirs owns the property. But as time goes on, the owner's title policy becomes more valuable. For example, suppose a property buyer purchases a $100,000 property with a $10,000 cash down payment and a $90,000 mortgage. The lender's title policy initially protects the $90,000 mortgage. The owner's title policy insures the buyer's $10,000 equity.

However, as the mortgage is gradually paid down, the owner's insured equity interest gradually grows until the owner has $100,000 title protection and the mortgage lender has zero protection after the mortgage is paid in full.

Although not as inclusive as a lender's title policy, the owner's title policy insures against most major title risks. For an extra premium, owners can receive the same full title insurance as lenders receive.

If title to the property was insured within the last few years, most title insurers will give a discount. The reason is they rely on the previous title insurer to have researched the title up to the date of prior title insurance issue.

If you bought your home or other property within the last few years, or if the property was sold within a few years before your purchase, be sure to ask if the title insurer will discount the premium. Depending on state insurance law and the date of last title insurance issuance, a substantial discount might be available.

Refinancing homeowners should also ask for a title insurance discount, often called a "reissue rate" or a "bring down rate." Whether buying or refinancing a property, it never hurts to ask for a title insurance discount.

Here's another title insurance secret title insurers don't want you to know. If you plan to hold title to your property for one, two or even three years, ask the title insurer about a "binder rate." In many states, title insurers offer this discount rate for short-term holdings.

For example, suppose you plan to fix-up a property and "flip" it for a quick resale profit within a year or so. If you ask for the binder rate, you will then pay an extra 10 percent owner's title policy premium but you will receive a windfall when you sell.

To illustrate, suppose the owner's title insurance premium is $500. For an extra $50 you can get the "binder rate." Then, when you sell within one, two or three years, you will receive a refund of the $500, but not the $50 binder rate premium.

Recently, I received an e-mail from the buyer of a brand new town home condominium. She asked if she needed an owner's title insurance policy since it was a new town home and there was no title history for it.

I politely answered she is especially vulnerable and needs an owner's title policy more than most home buyers. The causes of possible title risks for her include improper title conveyance to the developer, mechanics' liens by the contractor and subcontractors, unpaid property taxes, encroachments, and even forged signatures.

However, title insurance buyers should understand they are obtaining an "indemnity policy." That means the title insurer need not pay a title claim unless an actual title loss occurs or is threatened.

To illustrate, if evidence in the chain of title to a property shows there was an apparent forged signature of an ex-spouse, until that ex-spouse actually sues the current owner of the property, the title insurer need not get involved or make payment on the possible title claim.

Title insurance offers many benefits for both mortgage lenders and property owners. When purchasing any property, buyers should always insist on obtaining an owner's title policy because the mortgage lender's title policy offers no protection to the buyer.

If your property is being refinanced, or if you expect to hold title for just a year or two, be sure to ask the title insurer about available discounts.