Insurance Untangles Ownership

Hot Market Has Created Rise in Title Problems

After years of military life, Elizabeth and Stephen Allenbach were ready to settle down, so in 2002 they purchased a 100-year-old Victorian townhouse on Capitol Hill. But after they had been there for six months, a yellow summons arrived asserting a legal claim to title to the property.

"My God, we're going to be thrown out on the street," Elizabeth, a Library of Congress librarian, recalls thinking.

"This was 25 years of my savings. I thought I was going to be out on the sidewalk with all my belongings," she said.

The house had been dilapidated for two decades, with raccoons as its only residents, before someone had begun to fix it up it and put it on the market. The Allenbachs were continuing with renovations, painting the fire-engine red brick facade a neutral shade and putting in new wood floors.

It turned out there had been a split in the title at some point, creating both a legitimate and a fraudulent deed to the property. The Allenbachs had the bad one. The ins and outs of the settlement are complicated and lawyers won't discuss them, but one thing is clear: Despite their initial fears, the Allenbachs weren't tossed out.

When they bought the house, they had also purchased owner's title insurance, and the insurance company helped with a lot of "legal maneuvering" over the next two years to clear the way for the house to be deeded back to them, said Stephen, now a civilian budget analyst for the Army.

"If they had not had . . . [an owner's title policy], they would not have been protected," said their real estate lawyer, Nathan I. Finkelstein of Finkelstein & Horvitz PC in Bethesda.

To most people, title insurance is just another charge on the settlement statement when they close on a house. But when things go wrong -- and they can -- it can help in sometimes-messy situations.

The heavy volume of home sales in recent years has translated into more costly title problems, according to a report written last year by A.M. Best Co., the insurance research firm, and the American Land Title Association (ALTA), the District-based trade association for title insurers. From 1999 to 2004, the amount of claims paid out by the industry doubled, to $700 million -- but revenue brought in also roughly doubled, to $16 billion. Generally, the industry pays out 4 to 5 percent of premiums to settle claims.

In recent years, a spate of federal and state investigations into the industry's relationships with other entities -- reinsurers, developers -- including inquiries into alleged kickback schemes, have clouded the industry's image. Regulators and consumer groups have questioned the cost of title policies because of these relationships.

Title insurance executives defend the cost of their policies. Unlike with other insurance, they point out, a title premium is paid once, at the time of the sale, and provides coverage as long as the person to whom it is issued owns the property, they say.

"We are a risk-elimination business and we only get paid once," said Frank T. McCormick, mid-Atlantic region manager for insurer Fidelity National Title Group. "People say, 'Holy smoke! There's $1,200.' " But if you own a property 10 years, that works out to $120 per year, McCormick said.