Title Insurance – Change It or Leave it Alone?

If you’ve purchased a home, chances are you have purchased title insurance…although you may not have known it.  Securing title insurance is a routine part of the home purchase process.  This type of insurance protects you from the possibility that the seller doesn’t have a free and clear title to the house and property, and therefore cannot rightfully transfer ownership.  For example, what if the seller is really just an unscrupulous renter?  Or, what if there is a lien against the house because the seller didn’t pay some homeowner’s association dues?

In fact, if you’ve financed your home purchase with a loan, you may have purchased not one but two title insurance policies: not only an owner’s policy, but also a lender’s policy.  The availability of a lender’s title insurance policy helps buyers to secure financing by offering this protection of the loan collateral to the lender.  In the event you’ve lost the house because of someone’s claim, a lender’s policy will reimburse your lender for the outstanding loan amount.   Your owner’s policy in this case will reimburse you for the loss of your down payment and other principal payments, even though you may no longer have the house.

A title insurance policy is issued after a title search has been performed.  A title search involves examining public records, e.g., the history of ownership, tax records indicating any assessments or delinquent taxes, and a search for any unsatisfied judgments against the current or previous owners.  Any identified defects in the title are cured. 

If the title policy is underwritten with proper care, an insured loss under the policy is highly unlikely.  Title insurance is unique in its high underwriting expense ratios and low loss ratios.  Up to 10 cents of every title insurance dollar is expected to pay for claims, whereas around 80 cents of every property and casualty insurance premium dollar is paid out in claims.  An average title insurance policy costs around $1,000, although this varies by state and home value.

Title insurance is also unique in that insureds usually don’t shop insurers as they might for an automobile or homeowners’ policy.  In fact, usually your closing agent or attorney picks your title insurer.  So there’s less competitive pressure in terms of price for this line of insurance.

Title insurance is a different animal in the insurance world.  What are your thoughts?  Are there any reasons to change the title insurance marketplace?  Should consumers be more involved in the choice of title insurer?  Should there be more competitive pressure?  Let us know what you think.