All of us can see the benefits of having a home or car insurance. I have made claims on these policies. Though working with an insurance company is not the most pleasurable experience, at least I know that home and auto insurance have some value to me. They protect me in case something goes wrong.
But what about title insurance? I asked several of my friends. None of them have filed a claim, and they have never heard of a title company paying out on a claim. That made me very curious about title insurance.
What is Title Insurance?
Title insurance protects you against title defects and liens. If you buy a property, and someone claims ownership of that property, title insurance will cover the losses, and defend you in court.
Since home purchases are big purchases, title insurance gives homeowners peace of mind. They can be sure they are not buying from swindlers who are selling properties that are not theirs.
Homebuyers are required by banks to buy title insurance when buying or refinancing a house.
How Much of the Collected Premium Do Title Companies Payout?
A typical title insurance company pays out less than 5% of the collected premium. In other words, 95% of the premium goes to the bottom line.
Title insurance is a very high margin business. In most states, homebuyers pay around $1500 to get title insurance. Some states have set fixed prices for title insurance, but even in those cases, the premiums are too high relative to the risks these companies are taking.
Title Companies Spend A Ton of Money On Marketing
Title companies spend most of their profits on advertising and marketing. They use realtors and mortgage brokers to push their products. Some title companies have even resorted to some unscrupulous practices to push their insurance products, and have paid fines.
Limited Competition
In most states, state laws prohibit big insurers from offering title insurance. The reasoning offered is that multi-line insurers who offer multiple insurance products are risky though history shows the opposite to be true. Multi-line insurers are diversified because they offer multiple insurance products and more stable financially. Banks are also prohibited from offering title insurance, which allows title insurance companies to thrive.
Big Benefits from Digitization
Decades ago, title companies would send their employees to courthouses to review documents. But these days, everything is digitized, and you can access the records on your computer. This has helped these companies cut costs and be more efficient.
But consumers have not seen the benefits of digitization due to lack of competition, and outdated laws that have not been updated in decades.
Bottom Line
Consumers are required to buy title insurance when buying or refinancing a house. But given the very little risk, the title companies are taking, the costs are too high for consumers. The only way to fix this problem is by increasing competition and allowing banks and big multi-line insurance companies to compete. State legislators need to update laws to ensure that these title companies do not make excessive profits, and consumers are not ripped off.
