Consumers in New York state are getting a bonus, thanks -- as usual -- to their crusading attorney general, Eliot Spitzer. After taking on banks, stock brokers, insurance companies and others, Spitzer has now struck a glancing blow at the title insurance industry -- an industry that collects $1.1 billion in annual premiums just in New York state. Why he can't go further should be on the front page of every real estate section.
Title insurance can be seen as a special form of coverage which -- except for lots of exclusions -- tells buyers they are getting good, marketable, and insurable title. The usual ideas, as expressed here in the past, is that if there's an error in the public records, the settlement provider missed an important claim in the chain of ownership, or someone makes a title claim against you, then the title insurance company will defend your claim, pay damages, and cover your losses.
"Under the first-of-their-kind agreements," says Spitzer's office, "Fidelity National Title Group, Inc. and First American Title Insurance Company will seek title insurance rate reductions of 15 percent for all properties up to $1 million in New York." The two companies are said by Spitzer to generate more than half the title business in his state.
What caused such rate reductions?
It seems that title insurance is very expensive in New York state -- at least if you're a homeowner. However, it could be magically cheap if you were a major developer. Here's how the scam worked, according to the New York attorney general:
"The new probe revealed evidence of an illegal scheme by which real estate developers would receive free or discounted title insurance in other states in exchange for giving their New York business to the settling insurance companies. These discounts were not available to home purchasers and small businesses, who in effect subsidized the illegal rebates by paying the "full freight" of New York's high title insurance rates. The investigation also found that the insurance companies paid illegal referral fees to their customer's representatives who did not perform any substantial services."
Spitzer, as a state attorney general, must enforce the law and not make it. That brings us the real meat of the Spitzer's news release:
"Under New York law, title insurance rates are filed with and approved by the State Insurance Department. It is illegal for title insurance companies to charge anything but the filed and approved rate. New York law also prohibits title insurers from paying rebates to their customers and certain referral fees to their customers' representatives."
Ask yourself a question: Why on earth are customers legally prohibited from getting title insurance rebates? How is that good for the public?
When consumers hire a settlement agent it is the agent who selects the title insurance provider. And guess what? It turns out that title insurance companies pay a commission for the sale of their product. This is remarkable on two levels. First, title agents do not "sell" title insurance in the usual sense. How many times have you been to a closing and been asked to pick a title insurance provider? Settlement providers pick for you, and to believe their choices are not influenced at all by the commissions they receive is simply absurd.
How big are those commissions? In many cases, they are the overwhelming bulk of the entire insurance premium.
The state of Maryland looked into title insurance commissions and found that they were as much as 88 percent of the entire premium in 1977 and as much as 72 percent in 1979.
So you might think: Hey, that's ancient history. Big deal.
Not so.
Columnist Ken Harney, as one example, pointed out in 2004 that in the Washington metropolitan area title agents "typically take 70 to 85 percent of the title premium cut, depending upon the amount of business they direct to a specific title insurance underwriter, according to those in the industry."
Imagine that. If you pay $1,000 for title insurance then as much as $880 goes to the nice person who provides the policy and just $120 is necessary to actually provide insurance coverage.
There are two ways to solve this problem.
In Iowa, there is no title insurance . Instead, the state has established a title guarantee fund to protect consumers.
Also, there's no reason why state laws should prohibit rebates to consumers. Who, after all, is hurt by such rebates? It surely isn't the public.
Rebates to the public would mean that title insurance companies would have to compete for your favor rather than the favor of title agents. Settlement costs would fall dramatically, that would open home ownership to more people and that -- governments at every level keep telling us -- is good public policy.
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