Title Insurance is a Rip-Off, Right?

Some years ago I read an article in Forbes magazine. It must have been eight or ten years ago, now, and while I seldom read the magazine itself, the title of the article caught my eye because it related to title insurance and the title insurance industry, and I happen to wear, among other hats, that of a title insurance agent. So on I read.

The thesis of the article in plain English was that title insurance was just the world’s biggest scam, the insurance companies were no more than rent-seekers, and in any sane world everyone would just rely on the government to insure land titles and cut them awful rip-off artists out of the loop and there that will show them. Alternatively, all you need is a title opinion and there’s no reason to pay much for one of those, is there? In partial support of the author’s thesis he trots out the example of some mid-West state, Iowa I seem to recollect (I’ve slept since then, so don’t hold me to too high a degree of accuracy), in which the state guarantees, through its land registration system, that the record state of title as revealed in their indices will match the actual state of title. Can’t recall whether or not the government charged extra for the service or not.

I have a number of issues with the argument, but for the nonce let’s confine ourselves to some simple practicalities. The land registration systems in effect about the country are, to put it mildly, not uniform. The single biggest distinction is between those states on the one hand which were surveyed out under the Northwest Ordinance, and those which weren’t. For those not familiar with the story I refer you to a fascinating book, The Point of Beginning, which starts with a description of the evolution of the land surveyor’s art (there is, apparently, no coincidence in the fact that an acre is 43,560 square feet and not some other number) and then segues into a history of how the land that became the United States of America north of the Ohio and west of the Mississippi was surveyed out into parallelograms of various sizes. The book’s title refers to the actual point of beginning for the whole shebang. That’s right: There is a single remote point of beginning for every survey outside the original 13 states and the Old Southwest. It’s on the Ohio river, where a particular U.S. highway crosses the river; there’s an historical marker beside the road.

For land surveyed under that law, the government sent official survey teams into the wilderness with instructions to cut the thing into squares, more or less. Only once the land was completely surveyed off was it put out for sale, or given to the states to sell for their own purposes (when you hear of a “land grant university,” you’ve met one the founding of which was paid for with sales of that land). You could go to the federal land office in any particular area and tell exactly what land remained ready for sale, and what wasn’t on the market yet.

All well and good, but I happen to live in an area in which every one-eyed drunk with the delirium tremens and a transit strapped to his mule dragged a chain out of his tool chest and called himself a surveyor. With predictable results. How that system worked was the holder of a land warrant issued by some government (such as those issued to Revolutionary War veterans) went off into the woods and scouted around until he found him some land he wanted. He then hired him one of the aforesaid dipsomaniacs to survey it off, and then he went and registered his survey at the land office, heading back into the woods to work his land. I once saw a plat of the surveys that had been made of what was essentially the same land, superimposed on each other. It looked like one of those Spirograph drawings we made when we were kids. An absolute ball of hair, all laid out on paper by metes and bounds.

That system of land registration is why Abraham Lincoln grew up in Indiana and not Kentucky. His father couldn’t get clear title to the Knob Creek farm. Across the river the land was all laid out nice and neatly in squares and hey presto! problem solved.

The point of the above is that those lands not surveyed under the Northwest Ordinance do not come in tidy little polygons, with legal descriptions like “range such-and-so of section thus-and-such of This-and-That Township in Mulligatawny County, Illinois.” No; we get to ponder legal descriptions like, “thence in a northerly direction some 84 poles, more or less, to a rotten stump, apple tree marker.” Bear in mind that these legal descriptions are invariably found originating in deeds from 1923 and give no indication of whose memory to damn for their genesis. A pole, by the way, is 16.5 feet, and “in a northerly direction” narrows it right on down to just about 180 degrees of the compass. In other words somewhere out there you’ve got a corner. “To where the road used to be” is also an old chestnut. Or my personal favorite, “bounded on the north by the lands of Petty, on the east by the lands of Smith, and on the south by the lands of Jimson.” Bounded on the west by the Pacific Ocean, presumably. Mind you, Petty, Smith, and Jimson may or may not have been the adjoining owners at the time that legal description was put together; the surveyor may have been relying on other, even older surveys which simply designated those lands thusly.

But it gets better. Land title can be affected by all manner of things, from bankruptcy proceedings to the provisions of wills to divorce decrees to liens and encumbrances not appearing of record, but which will appear to a competent title examiner (like comparing legal descriptions to tax parcel information, or to aerial imagery of the land in question, available from Google Earth or from other public agencies). How about missing heirs’ signatures? A competent title examiner will frequently, in the course of doing a “forward search” (that is, looking for out-conveyances by the grantees identified in the “reverse search”) notice references in instruments outside the chain of title to the subject property references to siblings, other heirs, spouses, and so forth. That examiner will then look for the implications, if any, of those persons’ existence within the chain of title that’s being searched. What if the title examiner overlooks it? A title insurance policy will insure that risk; is it desirable that a government agency likewise guaranty that everyone who needed to execute an instrument in fact did so? Forty years ago?

In short about all that the land title office ought to be asked to guaranty, and all that it can practically guarantee, is that their own records correctly index the documents they have in their office. If all your local land title office is going to guaranty is the accuracy of its own records then you’ve really not got a great deal of assurance, do you?

When the government guarantees land title to be as reflected in the indices, what it’s guaranteeing are land titles the actuality of which is determined by the sorts of land surveying practices described above, and as affected by the kinds of documents and actions outside the scope of that agency’s records as described. Which is to say, the government is guaranteeing a risk the size of which it has really no effective method of even knowing, let alone controlling. Recall that the loss exposure on any title is a function of the price paid or the money loaned. Either the government will have to price its services based on actuarial risk (sort of like, you know, a title insurance underwriter), or it will have to eat that risk, or it will have to over-charge for that risk. Observation: Government agencies are not widely famed for their ability accurately to price risk and evaluate financial exposures (<cough> Fannie Mae, anyone? <cough, cough> Solyndra and $535 million out the door?).

Title insurance companies spend an enormous amount their revenue in the form of commission to their agents. Why? Because it’s the agent who is the company’s first line of loss control. A competent agent will identify title problems before they’re ever insured. Either the problem is then corrected, pre-closing, or the prospective buyer/borrower decides he’s not willing to accept the title in that condition, insurance or no, or alternatively the company makes a decision that it will “insure over” the defect. But this is the key: Eventually it’s the consumer’s choice to accept the title or no. If a title company makes a bone-headed underwriting decision, or keeps incompetent or dishonest title agents on its rolls, guess who pays? The company. In a government-underwritten system, guess who bears the loss? You and I, friend.

While we’re on the subject of governments getting into the title insurance business, let’s not kid ourselves who will be on the front lines of loss control: The people hired by local governments, or (gulp!) popularly elected, and who will be almost assuredly hired with reference to criteria having at least in part nothing to do with how reliably they can do their jobs. Oh sure, they’ll be well-enough meaning, but in all honesty, there is a reason that the IRS takes – successfully by the way – the position that a taxpayer may not rely on advice and opinions given to him by the United States government employees hired by the IRS for the specific purpose of giving advice and opinions of the kind reliance upon which may not be asserted. I assert that the same dynamics which have lead the IRS to take that position will apply in the staffing of the land registration system.

Well, the argument can be made, what the government will guarantee is the actual state of the title, so no one recovers unless he actually doesn’t own the title he thought he did. This would certainly address part of the loss-control issue. But here’s the problem with that from the insured’s standpoint: There is a difference, a radical difference, between good title and marketable title. “Good title” refers you back to the actual state of title; “marketable title” refers to a title that is sufficiently unimpeachable that you can actually find someone willing to buy or lend money on it.

Good title and marketable title are emphatically not the same thing. No one wants to buy a lawsuit, especially not a lawsuit to quiet title to land, which can be among the most expensive litigation outside Wall Street. Merely being confident that you’re going to win the thing will not change your mind, unless you’re the kind of feller who doesn’t mind adding tens of thousands of dollars to the cost of the property, as well as adding three to five years to whatever you wanted to do with it while your suit grinds its way up to the appellate court and back down (and God forbid your suit is remanded for a new trial or otherwise unspecified “further proceedings not inconsistent with this opinion”). Let’s throw in the fact that land title lawyers seldom end up either on trial or appellate benches, with all the implications of that fact for competent jurisprudence on the subject, and either you buy a title that is like Caesar’s wife – above question – or you find someone to accept the risk that she Got Around back in the day. That someone is a title insurer. As a taxpayer, do you want the person accepting that risk to be the taxpayer? You? If you wanted to be in the title insurance business, wouldn’t you just buy some shares in Old Republic, or LandAmerica, or Stewart Title? Because there’s no such thing as “the government”; it’s you and I, ol’ sport, together in the risk management business. Still sound like a good idea?

So much for why it’s a bad idea from a government’s perspective. Let’s talk about the Little Man (that’s you, gentle reader). As mentioned, the standard American Land Title Association (ALTA) title insurance policy insures, among other things, good and marketable title, of the estate described in the policy (ownership in fee or cotenancy, leasehold, or mortgagee), in a named person. It’s a contract of indemnity. That’s important, because to recover on a contract of indemnity the plaintiff need not show fault in anyone. “You promised me that X was the state of the universe. The state of the universe is in fact not-quite-X. I’ve suffered loss by the discrepancy. Please send money.” That’s the bare-bones structure of a claim under an contract of indemnity.

Let’s say I have my ALTA owner’s policy that insures to me marketable title, and I go to sell my property and my prospective buyer’s title examiner catches a problem or potential problem with my title that was not caught when I bought the property. My would-be buyer backs out of the deal. I’ve now lost a sale by reason of a possible title defect. So I make a claim under the policy. Assuming it’s within the scope of coverage my insurer can either buy my land for up to my limits of coverage, or it can bear the expense of establishing that my title is not in fact defective, or it can pay to fix my problem. Whichever is cheapest under the circumstances then existing. And if my insurer buggers me around on acting, most states have bad faith failure-to-pay statutes which provide for enhanced relief, as well as general consumer protection statutory framework that frequently also applies to insurance companies’ relationships with their insureds. Anyone want to wager on a government willingly exposing itself to liability under similar circumstances?

May as well ask when was the last time we heard of a government agency deciding among a range of responses which was the overall least expensive way fully to remedy a problem. In contrast, when was the last time we heard of a government agency pushing someone’s problem to the back burner, either because someone with more political suck or from a pet constituency got in line ahead, or just because the person dealing with the matter was a government worker and knew he couldn’t be fired? Does government customer service still sound like a good notion for the homeowner who’s discovered that he’s got a forged signature on a deed in his chain of title?

By like token, assume my neighbor sues me alleging that he owns at least some of the land within my policy’s coverage. My title insurer pays my lawyer to defend me (and in truth that expense of defense can be the principal economic benefit to me of having the policy in the first place).

But title insurance costs money, doesn’t it? Why, if you have to buy an owner’s policy on a $1.6 million purchase, you may have to pay as much as $5,000± for the policy, maybe more if you buy additional endorsements. Let’s see, that’s 0.3% of the deal; three-tenths of a whole percent. If I’m buying my house for $95,000 I may have to pay as much as $1,000 or so, a bit over one percent of the deal. Bear in mind that a good portion of that money is going to the title agent who’s the principal fellow standing between you and losing your house, and 1.05% on top of the deal doesn’t sound like too bad a bargain, does it? But why should the title agent get that big a slice? Well, because if the company has to pay a loss, guess to whom it looks to get well, kiddoes?

Can’t you just go and get a title opinion and get out of it even more cheaply? Well, for starts expressing an opinion as to land title is the practice of law, which means you will have to pay a lawyer for that. And of course you will have to select your lawyer yourself (title insurance companies keep a pretty tight rein on their agents; they do most of your due diligence for you in weeding out the charlatans and the fools). No lawyer smart enough to know how to search a land title is going to offer you an indemnity. He’s a lawyer, not an insurance company. If he were an insurance company he’d charge you what a title insurance company charges you. What you’ll get from your lawyer is an expression of opinion that is subject to all the caveats that your lawyer can think of.

If your lawyer’s opinion turns out to be incorrect (and not just possibly incorrect, but actuallywrong), you have an action against him, not in contract (an indemnity), but for professional negligence. Let’s ignore for the moment that the universe of lawyers who practice in the area is tiny indeed. Let’s assume you find one and he’s willing to file a suit against the guy who issued your title opinion. The burden of proof is on you to prove – for which read: you must pay to prove – that (i) his opinion was in fact incorrect (in other words, you’ve got to prove your own title to be defective, as opposed to merely possibly defective),and (ii) by the prevailing standards of professional care he ought to have caught the problem but didn’t, and (iii) that you have actually suffered a loss. But you don’t get to recover your expenses of proving up the state of your title, or of that standard of care, or of proving your lawyer’s failure to live up to that standard of care, or of the extent of your loss. Can you say, “expert witness fees,” anyone?

There aren’t any bad faith failure-to-pay statutes that apply to defending oneself from a malpractice claim. Nor will your typical consumer protection statute prevent your lawyer from defending himself. Barring truly egregious conduct, professional malpractice claims don’t get resolved in the plaintiff’s favor on summary proceedings. If they don’t settle they go to trial, and then to appeal. Your lawyer of course will be defended by his professional liability insurance carrier. Your lawyer will be paid by you, and a claim involving a claim for professional negligence on something as esoteric as a title examination is not one you’re likely to find anyone competent to represent you on a contingency fee. And in the meantime of course your title to your land is all screwed up and you can’t safely dispose of it or borrow money against it, and you’d be foolish to put any of your own money into keeping it up, lest you lose your suit.

All of which is to say that that Forbes article was one of the most foolish loads of bilge water I believe I’ve ever read, Justice Brennan’s opinions not excepted.

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