The Cost of Title Insurance is Worth the Investment
Fewer claims do not equate with a policy’s value
By
Northwest Title
's Management Team,
Whenever there’s an article in the news about title insurance, all too frequently
there is criticism about the cost. This perception occurs because there are fewer
claims with title insurance compared to other forms of insurance. The higher percentage
of claims an insurance company pays should not be equated with the value and cost
of the policy. This is especially true with title insurance.
Most types of insurance cover incidents that may occur in the future, which is the
case with health, life, auto and homeowner’s insurance. The cost of these policies
is based on the insurers’ estimation of how much they will likely pay out in claims
over a given period, plus administrative costs and a reasonable profit. The volume
of claims is typically high with these types of insurance.
Title insurance, on the other hand, is based on loss prevention, which means
that a much larger percentage of the premium dollar is spent preventing title problems
from occurring. These upfront costs cover searching, identifying and eliminating
risks that could result in a future claim.
A typical title search involves searching the public records, including visits to
the offices of recorders or registers of deeds, clerks of courts and other officials,
and the company’s own title plant. Title professionals look for such things as second
or third mortgages, judgments, liens, street and sewer system assessments, special
taxes and levies, and
numerous other matters. No other line of insurance does this level of due diligence
before issuing a policy.
Over the long term, title insurers pay fewer claims than other insurers, but their
operating expenses are much higher because of these upfront costs. To compare, operating
expenses for property and casualty companies, which issue auto and homeowners insurance,
is less than 30 percent of revenues. The expense ratio for title insurers averages
90 percent.
Another reason some mistakenly believe that title insurance costs are his is because
they don’t fully understand its value. Title insurance protects the single largest
financial investment most people make. One out of every four residential real estate
transactions has an issue with the title, which is usually resolved by title professionals
before the buyer closes.
When there is a claim, it is often due to a title defect that was undetected during
the title search. The most common problems resulting in title claims are the result
of fraud and forgery. And, when there is a loss, it is usually significant—sometimes
in the hundreds of thousands of dollars.
An Owner’s Policy of Title Insurance, which can be obtained in addition to a Loan
Policy, remains in effect for as long as the policyholder (or their heirs) owns
the property that is insured. A claim could actually be filed 50 or 100 years after
the policy was issued. And, an Owner’s Policy covers legal expenses involved in
defending the title on behalf of the homeowner.
The cost for title insurance is a one-time fee, as opposed to other lines of insurance
that charge a monthly, quarterly or annual premium over the life of the policy.
When you consider the size of the asset being protected, title insurance is probably
the best value among the majority of costs associated with closing on a new home.
For more information on the title insurance industry, please the American Land Title
Association Web site at http://www.alta.org