Title Insurance & Sleeping Roads

Traditional insurance agents and brokers do not normally get involved with title insurance, except maybe to place E&O coverage (professional liability) for a title/escrow agent or title service provider, as it is an obscure specialty line of insurance sold by title insurance agents and attorneys.  Two title insurance controversies show the widely varying perspectives of this business.  There are municipalities in Vermont that have been reclaiming old easements to the detriment of landowners, and there are vocal critics, including regulators, claiming that title insurance is too expensive, a racket, and is even unnecessary.

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Title insurance is typically thought of as guaranteeing ownership (title) to the buyer or lender.  The mechanics of the business are more complicated than this.

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Homeowners purchase title insurance as part of a closing process (required by lenders), yet very few actually ever utilize the title insurance. According to Forbes magazine (see here, 11/13/06 issue), the title insurance industry is a racket.  The article notes that the average cost of title insurance is $1,472 per home (paid at the beginning of the mortgage), the cost of the title search is as low as $25 (less than 2%) and the cost of claims averages $74 (or about 5%).  Regulators have begun to investigate the business and set standards (see here and here).

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The numbers can be misleading.  According to the American Land Title Association, title insurance emphasizes risk prevention, and the risk prevention component is labor intensive and costly.  The key is identifying title defects before a closing.  (An excellent overview of the title insurance business, including its history, is provided by the ALTA here).

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Landowners in Vermont are feeling the impact of undisclosed title defects and benefiting from their title insurance.  A recent summary in the Wall Street Journal (see here, $$) summarized the controversy:

Vermont has scores of old public roads that haven't been used as such for decades and haven't been kept up. Some resemble paths through the woods or private driveways, while others, at least to the casual observer, are indistinguishable from their surroundings. Now, with more retirees and second-home buyers acquiring Vermont real estate, some towns are rushing to stake claims to these sleeping roads.

Some private residents are helping the municipalities by reviewing old land records. 

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Title insurers are footing the bill.  The issue has generated significant controversy in Vermont, and legislation has been passed to provide some assistance to landowners and title insurers. (See here, here, here, & here for additional information.) 

Comments

[Diane Cipa, General Manager, The Closing Specialists®]

Yes, there is value in title insurance. The lion's share of the premium pays for the examination and clearance of title prior to the issuance of the policy. The policy then insures against errors or items that couldn't have been found in a competent search.

One thing I'd like to add is that buyers must make certain they purchase an owner policy. The lender is requiring a loan policy. In most states both can be issued at the same time but unless the buyer says something they might only have paid to protect the lender, not themselves.

[Jason]

When I purchased my home I was directed by my realtor to use their title company. But a little searching on google pulled up freetitlequote.com and I got a much better offer from other title companies.