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Lawyers Speak Out on the Title Industry

January/February, 2003 - Volume 82 Number 1

by Dean A. Rogeness

Last year the Title Insurance Committee of The American College of Real Estate Lawyers (ACREL) surveyed its members on selected title insurance issues. Two hundred and eighty-three (283) ACREL members took part in the survey, an excellent response rate. The results of the survey are a clear call for a review of post-closing title services and the development of policies and standards for post-closing title services including delivery of documents. (Editors Note: Although some of ALTA®’s members expressed concerns about developing such standards, the ALTA® Board of Governors thought the membership would still be interested in the results of this survey.)

Who is ACREL?

The purpose of the College is to gather together lawyers distinguished for their skill, experience, and high standards of professional and ethical conduct in the practice of real estate law, who will contribute substantially to the accomplishments, achievements, and good fellowship of the College and to the best interests of the bar and the general public.

ACREL members are among the most knowledgeable and experienced real estate practitioners, dealing with all types and aspects of real estate transactions, including title insurance. They are involved in one capacity or another in the closing of a significant volume and dollar amount of the commercial real estate transactions in the United States in any given year and in the purchase decisions for the title insurance issued in connection with those transactions. Ninety-one percent (91%) of the respondents rated their level of knowledge of title insurance as good or average.

Why Do a Survey Now?

The Committee felt that there could not be a better time to do the survey. Consolidations and mergers among title insurers are up; the number of independent title insurance companies is down; financial reporting is more complicated and obscure than ever; cost pressures and necessary risk reassessments are ever present; people involved in the business are changing, requiring new relationships to be established; the Internet has accelerated the documentation and closing process; electronic signatures and filing are somewhere on the horizon; and title insurance has gone international. Insurance regulators, limited by budgets and traditional single state statutory frameworks, continue to regulate issues that may require sophisticated multistate approaches and solutions.

Demands for new and expanded title coverages and services are also increasing, consistent with the growth of capital markets and the increasingly national scope and institutional nature of much of the real estate business. Competitive products are making their appearance. Low-cost credit enhancement coverage sold as an alternative to title insurance in the home-equity loan market has become a reality. There is every indication that companies selling these products have their sights set on other markets.

In addition to the above, ALTA® is doing one of its periodic rewrites of many, if not all, title insurance forms.

Survey Results

The survey was divided into six distinct areas. They were:

1. who selects the title insurer;
2. analysis of retention limits and credit in the selection process;
3. rating of title industry services in specified areas;
4. effect of consolidation in the title insurance industry on specified services;
5. actions by a National Association of Insurance Commissioner’s task force on the creditors’ rights exclusion provision in the title policy; and,
6. suggestions for improvements in title coverages offered and services provided.

Let’s look at some of the highlights of the Survey.

• The selection of a title insurer for a transaction is seen as a joint attorney/client decision in 61% of the responses. As to the balance, responses indicated that the attorney selects the title insurer in 22% of the cases and the client in 18%. Dissatisfaction with a company’s service (including claims payment) or claims paying ability was an important determinative in the selection process.
• ACREL members, by a wide margin, felt that analysis of a title insurer’s financial strength and retention limits should be a regular part of the selection process in both the primary and reinsurance situations. Although 61% of respondents indicated that either they or their clients do such an evaluation, declining percentages replied that they check retention limits, use rating services, inquire about reinsurance treaties, or know how companies set their own risk-retention limits.
• Forty-five percent (45%) of survey respondents felt that the attorney has a legal obligation to analyze the financial strength and retention limits of the title insurer. The challenge is how to make an informed decision in this area and fulfill a perceived legal obligation in doing so. (This article takes no position on whether or not there is such a legal obligation.)
• ACREL members want information from independent sources on how title companies set risk-retention limits. They also want companies to post current financial information and risk-retention limits on the Internet for easy access.
• Although probably all respondents exculpate themselves in their closing opinions from any liability for title matters, only 15% exculpate themselves and their firm from any responsibility for determining credit and risk-retention limits of a title insurance company.
• With respect to title industry services, most respondents were relatively satisfied with coverages provided but relatively unhappy with post-closing services, including issuance of error-free policies and return of documents. (Such services are all the more important to clients in the current environment of increasing scrutiny by auditors looking for completed files.)
• In this era of national transactions, increased frustrations were voiced respecting the inflexibility and premium structures of strictly regulated states, such as Texas, New Mexico, Florida, Oregon and New Jersey.
• Only 20% of survey respondents were aware that the National Association of Insurance Commissioners has been holding hearings on possible recommendations to the states to limit or prohibit the ability of title companies to provide "creditor’s rights" coverage by deleting the creditors’ rights exclusion from a title policy. Most felt that such prohibition or restriction would adversely affect their clients’ interests but would not be willing, if the coverage were eliminated, to opine on their clients creditors’ rights exposure (or would limit the opinion in a material way).
• Initial responses were decidedly mixed to a general question on the effect of mergers and consolidations within the title industry on coverages afforded, underwriting, service, cost, and claims. In a follow-up, more focused question, substantially all responders felt that the effects will be adverse.

Coverage Needed

Two questions on the Survey required written responses. For the question, "What coverage would you like to see added to the ALTA® Standard Form Policies that is not usually included in available endorsements?," respondents listed the following:

• Zoning and certain local law coverages, including legal lot
• "Fairway" endorsement
• UCC Coverage
• Water rights
• Coverage for damages accruing during the time it takes to cure a title defect if the defect was not disclosed due to the negligence of the title company
• All items from the Comprehensive Endorsement
• Last dollar coverage Affirmative insurance against navigational servitudes
• Usury endorsement
• Endorsements generally available in other states but which are not available in highly regulated states such as Texas, New Mexico, Florida and Oregon
• Surface rights coverage over oil and minerals reservations
• Coverage against forfeiture based upon illegal funds
• Environmental

Service Improvements

In the second written question, respondents were asked, "What one improvement would you like to see in a title company?" Here are the most frequent answers:

• Prompt issuance of final policy
• Reading exceptions to determine if they really apply to the property
• Standardization of endorsements
• Automatically included complete and legible copies of underlying documents with the commitment
• Use email to send out commitment and exceptions
• Do more online
• Better claims service
• Speedier production of the final policy
• Better trained personnel
• More proactive recommendations of endorsements and coverages
• Accuracy of final policy
• Better tracking of final policy and closing documents
• Texas joining the rest of the world
• Black-line copies of amended and supplemental commitments. The rest of the real estate world does it.

Conclusion

The author recognizes that the survey was imperfect in some respects. One respondent commented that the survey seemed biased toward the larger urban transactions and did not really speak to the type of transactions she handled in a smaller urban setting. Another commented that questions dealing with title agents, agencies, and bar- related title insurance should have been included. Other criticisms no doubt can and will be made. Notwithstanding any imperfections and omissions, if the data flowing from this survey proves useful to a variety of persons, entities, and associations involved in real estate, the survey will have been a success.

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Dean Rogeness is chair of ACREL’s Title Insurance Committee. He can be reached at dean@rogeness.com or 413-567-5480. This article is an excerpt from the full report. For the complete survey report, go to ALTA®’s Web site, click on Membership, then Industry Research.