Title insurers, unlike property or casualty insurance companies, operate under the theory of “risk elimination.” This means that title insurance premiums are paid to identify and eliminate potential risks and claims before they happen, whereas most other types of insurance anticipate rates and losses based on actuarial studies and the assumption that a certain number of claims will be made.
Medical and casualty insurance premiums, for example, are paid to insure against an unpredictable future event, knowing that risks exist and claims will occur; therefore these premiums are paid in regular and continual installments. (A lapse in payment of this type of premium often means a lapse or cancellation of coverage.)
A title insurance premium, on the other hand, is a one-time flat fee regulated by the Division of Insurance and paid at the time of closing. A title insurance policy is like a pre-paid legal defense against any challenges to the insured’s title, promising that the title company will reimburse the insured financially for losses resulting from hidden defects in ownership rights.
Two components of a title insurance rate
A title insurance rate is comprised of two primary components: 1) the costs to produce the product itself (including the search, examination, and commitment and policy preparation), and 2) the costs associated with the risk of the product.
Production costs are the single most significant factor in rate calculation and include all expenses associated with the production and delivery of the insurance product to the customer. The title insurer that hires skilled title personnel, obtains quality record title information, and makes expenditures for state-of-the-art searching tools can dramatically reduce title insurance risk. Therefore, title companies spend a high percentage of their operating income each year hiring and training competent professionals, as well as collecting, storing, and maintaining quality record title information with advanced technology.
Of course, hiring skilled personnel and keeping up-to-date equipment also translates into quicker turnaround time, more accurate commitments and policies, and more professional closings—benefits which are directly and immediately available to the consumer.
The goal of the title company is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Risk can be virtually eliminated through a diligent search conducted by skilled professionals. Nonetheless, human error and undetectable danger—for example, fraud through forgery or impersonation—remain the main sources of claims.
Regulation of rates
The title insurance industry is unique in that regulation by the state serves as a natural check on profits.
Title insurance companies and casualty insurance companies are classified by statute as “Type II” insurers, which means that rates are ultimately set in response to competition in the marketplace. Colorado’s legislature recognizes that fair competition in the open market ensures that Type II insurers will not enjoy unreasonably high long-run profits.
In the event that fair competition does not lead to fair rates, Colorado Revised Statutes §10-4-403 establishes the following important rating restrictions—that title insurance rates cannot be “excessive, inadequate, or unfairly discriminatory”:
- An excessive rate would be one that leads to “unreasonably high profits” over a “long/sustained” period of time.
- An inadequate rate would be one that causes an insurer to operate at a loss for an extended period of time. Inadequate rates can lead to lower reserves. Low reserves can lead to insolvency, which obviously creates the inability to honor claims.
- A rate is unfairly discriminatory if like customers are treated dissimilarly. “Like customers” are those who receive the same services, with like risk exposure, from a title entity and therefore should pay similar costs for the services rendered.
A title insurance company must meet the statutory filing requirements proscribed in Colorado’s statutes and regulations before a rate can become effective. Under current law, a company must deliver to the Division of Insurance a filing packet before any new rate can become effective.
Further, an insurer must develop accompanying justification for each rate that will be kept at the principal office of the filing company.
The purpose of the rate justification is to demonstrate to the Division that the insurer’s rates are not “excessive, inadequate, or unfairly discriminatory.”
While it may be advantageous to shop around for cheaper title insurance rates, keep in mind that most reputable companies in the same market file rates within $20 to $30 of each other. If a rate is exceptionally low, it may be worth doing some homework to discover whether the company is cutting production costs, since inexperienced personnel or a poorly maintained title plant can not only compromise service levels but also lead to higher risks.
Keep in mind also that a title premium is just one portion of the total dollar amount paid at closing. A title company that charges lower premiums may more than make up those costs with additional fees at the closing table.
Also, take into consideration the title company’s reputation. A closing delayed by even a few days can cost the buyer and seller more than their savings in premiums. The title commitment should also contain a full search and accurate disclosure of all items affecting title. And the policy itself must be backed by the financial strength of a reputable underwriter with a strong rating for its claims-paying ability.
Although price is always a consideration to cost-conscious consumers, there is also something to be said for quality title work, professional closing services, and financial integrity. If you work with a title company that offers quality products and services at a price that is competitive (not too high and not too low) with other title companies in the area, you can be assured the title insurance premiums will protect your investment as long as you or your heirs own your property.