Title insurance premiums reportedly topped $12 billion in 2014. While this is the latest figure I’ve seen, there is certainly no reason to suspect that figure to be dropping. Cost of title insurance is a real cost to any commercial real estate deal. Is there any way it can become less expensive? The answer may lie in emerging technology. Blockchain anyone???
It’s widely understood that title insurance guarantees that a transferee takes title to property it acquires. A buyer wants protection that the investment in property isn’t lost because he failed to pay the purchase price to the right person (the person who owns it, rather than a fraud). Likewise, if the buyer is borrowing purchase funds, the lender wants assurance that the security interest it takes from the buyer will allow the lender to foreclose on the property if the loan defaults.
In the United States, ownership is determined by reviewing transfer and other documents concerning specific property recorded in the local court. Traditionally, in the earliest days of such records, the buyer’s lawyer reviewed the deed by which the seller became owner of the property, the deed by which the prior owner became owner, and so on until the event which established the right of the sovereign to keep land records (for example, throughout much of the eastern United States, this would go back to the grant of the British Crown). Then the same work forward in time to the present was performed to ensure that there was no deviating branch in the title that could not have been discovered in the process of going back in time. Finally, the lawyer ensured no deeds of trust, leases, significant easements or other issues impacting enjoyment of the property remained outstanding.
Title insurance companies took on the role of protecting investments in real property, taking a premium to insure property ownership. Title insurers don’t do this on the basis of statistical models of negative events based on experience, as in life or casualty insurance. Instead, title insurers employ title searchers to do the job lawyers previously did, and only after an insurer has determined what conditions to coverage (e.g., a proper deed to the buyer, release of prior deeds of trust) and exceptions to coverage (e.g., accruing property taxes, existing easements) there are will it provide title insurance to a buyer and to the buyer’s lender. In other words, they insure against risks they conclude do not exist.
What about the work involved in the title search? Although rarely performed by lawyers today, the process has not changed much. Title insurers can limit the work necessary if they have insured the property previously. Additionally, while many jurisdictions have put land records online, most have not. While this is a time saver, the process is largely the same. No quantum leap forward has occurred alleviating the cumbersomeness and the time investment.
As noted above, a title insurer believes that there will be no insuring event. And since a fee is typically charged for the work to issue a binder (which defines the conditions and exceptions to coverage), separate from the insurance premium, this raises an interesting question: what is the premium for?
Next: Title Insurance – Who Is Getting Paid?