What People Don’t Know About Title Insurance and Why They Might Not Like A Current Trends Away From It
The closing process was (and often still is) long and painful. Lots of coordination and too much paper. Now, there’s wire fraud to keep people on their toes. [Never give or receive wire instructions by email but, that’s not what I want to talk about here.] Today, I want to tell you what title insurance does for you that you don’t know anything about. It cures your title. Now. There’s some reason to believe it might not do that in the future.
Title insurance is different from other types of insurance in that it insures against the past and not the future. That means, your title insurer can know what’s going on with the title to your home or condo because it’s already happened, and there are records to prove it, the documents in your local recorder’s office and courthouse. It gets better because, not only can your title insurer know about defects affecting your title, they do know, and they know before your closing. They search the records and a skilled title examiner forms a list title of defects that they present to buyers and sellers before the closing.
This makes title insurance one of the most valuable types of insurance you can get. It eliminates all the known sources of potential aggravation and insures you against the rest. Your auto insurance cannot directly prevent an accident. Your homeowner’s insurance cannot directly prevent a flood or a house fire. Life insurance doesn’t dissuade the grim reaper. Your health insurance seeks to keep you healthier (and cheaper to insure) by covering preventive care and sending you texts and emails to make sure you exercise and eat right but I’ll bet you dollar to donuts that works far less often than the times your local skilled title examiner has prevented old title defects from becoming new headaches.
There’s no magic elixir or land title gym membership. It’s all very mundane. When you decide to sell or buy real estate and order title insurance, the title examiner searches the public records and some internal company documentation, isolating the documents and notes about potential title defects, an old mortgage the owner forgot about, a judgment lien the owner didn’t even know about, municipal building violation, garbage or rat removal liens, water liens, deed defects, old deed covenants saying that you can’t raise chickens on the land or put a she shed behind the house, legal description defects including encroachments by neighboring structures onto your land and the other way around, when your stuff encroaches onto the neighbor’s land. The defects are listed on the title insurance commitment and must be agreed to or cured at or before your closing.
Sure, there are some latent defects that won’t be discovered, a really convincing forgery, a misposted trust deed, or a secret mechanic’s lien in Illinois, but that’s what the insurance piece is for, making title insurance part curative and part insurance, but it’s mostly curative. Low claims experience proves that. Title examiners find more than they miss.
So, why is this important to know now?
It’s important because some title insurance computer and math gurus are trying to change the way title is insured. They want to use mathematical models to calculate risk, much like actuarial tables are used in casualty and life insurance. Once risk is calculated, prices can be set and (I imagine) potentially risky titles can be rejected — based on the model rather than actual risk. This can eliminate title examination and curative measures which require documentation, time and skilled labor.
In a world demanding better, faster cheaper, that might sound great, and my warnings might sound like the rantings of an old fogey Luddite, but I’m an old fogey with a masters degree in information systems, and it all depends on what the new risk models do to the curative piece of the title insurance pie. Mathematically reducing claims risk to increase title company profitability won’t necessarily eliminate consumer risk if the math encourages title companies to eliminate the curative piece. Consumers might find themselves dealing with all the knowable title defects post closing that the current title insurance model eliminates prior to closing.
We’re already seeing increased real estate litigation from the elimination of attorneys in real estate transactions. What the lawyers don’t find and work out before the closing gets litigated after the closing. It’s all better faster cheaper fun and games until you get to the expensive and long slow slog of litigation to fix things on the back end.