Washington, DC: Title insurance is an industry that is not well understood, leaving many people who purchase title insurance in the position of being taken advantage of. In fact, according to a CNN/Money article, in 2005 over a dozen title insurers paid tens of millions of dollars to regulators because of seemingly deceptive industry sales practices.
Title insurance is insurance to protect a person's financial interest in real property against any losses due to title defects, liens, or other issues. A person purchases title insurance to protect against the possibility that someone else has a claim to property that was purchased. It works by providing an assurance that the title to a property is clear before the sale occurs and by providing protection in case an undiscovered title issue comes up after the sale of property is complete. For example, if you are planning on purchasing a property, a title search will often tell you whether or not the person selling the property actually has the right to sell it. If this information does not come up in the title search but arises after you have purchased the property, title insurance provides you with protection.
Title insurance is required by lenders to ensure there will be no other claims on properties they are financing.
According to the article in CNN/Money, most people defer to their real estate agent (or mortgage broker or lender) when choosing someone to sell them title insurance. However, those people are subjected to marketing from title insurers. Most of the marketing is legal, but some involve illegal dealings such as free vacations and kickbacks. An article in the Washington Post notes that in California three large title insurers paid $12.5 million to settle charges that alleged the companies were involved in illegal kickbacks.
Iowa is the only state that bans title insurance sales, instead using a state run Title Guaranty Program. The program costs $110 for up to $500,000 coverage. Including additional charges, the average total cost for title protection is around $400. Outside of Iowa that number is around $1,100 for the average home.
Some states are looking to lower the rates people pay for title insurance. In California, the insurance commissioner announced plans last summer to cut rates by an average of 23%. The commissioner said that studies found there was little business competition in an industry that makes billions of dollars a year.
Some title insurers may also face lawsuits related to overcharging title insurance costs when consumers were refinancing as opposed to purchasing. Usually homeowners are charged a reduced rate for title insurance when they are refinancing a home.
Chicago Title Insurance Company has already settled one lawsuit in Minnesota that alleged that the insurer "failed to give borrowers in residential mortgage transactions the benefit of a discount or "reissue credit" for owner's and lender's coverage title insurance policies under its rates on file with the Minnesota Department of Commerce." The lawsuit claimed that Chicago Title's reissue rate was 60% of the standard rate but consumers were charged the standard rate.