In recent months, enforcement actions by both HUD (Department of Housing and Urban Development) and a variety of state agencies have brought the subject of title insurance, and its costs, into the news. The title insurance industry is big business indeed. Consider that just about every time a parcel of real estate changes hands or is financed, a title insurance policy is purchased.

California Insurance Commissioner, John Garamendi, has estimated that the average title insurance premium in the state averages more than $1,400. Multiply that by all the sales (over 500,000 annually) and the wave of refinances, and we are talking about big numbers -- for one state alone.

But the cost of title insurance is pretty much beneath the consciousness level of the average consumer. After all, it's not something that most people purchase on a regular basis. Even for those who, lately, have been refinancing almost yearly, it is generally thought of as just one of those "necessary costs" that come with the transaction.

Because title insurance is so infrequently purchased by any given consumer, it is not a product that is advertised to those who buy it. People who purchase title insurance typically purchase it as a result of a referral -- sometimes not even discussed -- from the professional who handles their transaction. In the case of new homes, builders usually choose the title insurance company; in the purchase/sale of an existing home, the real estate agent will likely influence the choice; and in a refinance, the lender or mortgage broker will probably determine the title insurance company.

Because the placement of title insurance business is generally referral-based, it is no wonder that title insurance companies are interested in maintaining good relations with those who might refer business to them. Indeed, they sometimes even become tempted to pay for such referrals. I say "tempted" because it is illegal to pay someone for the referral of title insurance business. It is also illegal to accept payment for the referral of title insurance business.

Under California law, it is not only illegal to pay for actual referrals of title business, it is also illegal to pay any "...consideration to any person as an inducement for the placement or referral of title business." That is, it is illegal to pay money, or other consideration, to others even to try to obtain referral business. California Insurance Code section 12404 spells out a number of activities that are considered, per se, inducements for the placement of title business -- i.e. activities that are deemed unlawful.

Among the specified unlawful activities are "providing, or offering, to provide assistance with the business expenses of any person", "providing, or offering, to provide any form of consideration for the benefit of any person, including... merchandise or merchandise credits" and "furnishing, or offering to furnish all or any part of the time or productive effort of any employee of the title insurer... for any service unrelated to the title business."

To hear that these activities are unlawful would come as quite a surprise to most people in the real estate business. It is virtually part of the real estate business culture, that title companies and their representatives offer all sorts of services that help to reduce the business expenses of agents, and that they provide all sorts of services that would seem unrelated to the title business. How can this be?

There are at least a couple of explanations, and they mostly turn on issues of interpretation. For one thing, it doesn't even take exceptional creativity to find that all sorts of services actually are, or can be, related to the title business. Suppose, for example, that a title company employee holds an open house for a real estate agent. Is that prohibited? Well, also suppose that the person displays title company material and hands out its brochures to people who come to the open house. Now is it a violation? Maybe, maybe not.

Additionally, section 12404 also provides that "reasonable expenditures for food, beverages, entertainment, educational programs, and promotional items" are ordinary business expenses and do not constitute an inducement for the placement of referral business. Undoubtedly, some lawyers could make a career out of exploring the limits of that loophole.

It will be interesting to see how the California Department of Insurance treats these, and related, questions of interpretation in the current atmosphere of enforcement zeal. Meanwhile, both real estate companies and individual agents may be well-advised to tread carefully in this area. In the realm of prohibited inducements, it is as cursed to receive, as it is to give.