Insurance Untangles Ownership

There are an "abundance of hidden risks that don't show up in title exams," McCormick said. "Even the most competent title examiner is unable to ascertain if the person who signed the deed was competent, whether all heirs have signed the deed, if a deed was signed under duress, or if a deed had been properly delivered. There are over 20 so-called hidden title defects, and I think I have seen just about every one of them."

Sometimes title insurance allows a property with a possible defect to sell, McCormick said. He pointed to a case where a life tenant -- an individual who has an interest in the property as long as he or she is alive -- never signed a deed with the heirs to transfer his interest, as required. But by the time the house was for sale, the life tenant was 98 and in a nursing home. When he died, his interest would disappear. Fidelity decided the risk was worth taking and issued a title policy.

If it was ever challenged, "we would step up and defend," McCormick said. Without title insurance, the property probably would not have sold until the man had died, he said.

The most common title problems include recording errors, delinquent taxes and outstanding liens, according to industry executives. Marital rights of a spouse who is not legally divorced, undisclosed or missing heirs, secretly married sellers and other family entanglement issues are also common, according to title insurance conglomerate LandAmerica Financial Group Inc.

"The reality is, there are an astounding array of circumstances that can present themselves that can cause a title problem. . . . Often some innocent buyer who in the meantime has acquired title to the property is now confronted with someone knocking on the door or, even worse, a lawyer . . . [saying] the person who conveyed title to you did so . . . [wrongly] and now we're asserting a claim," said Finkelstein, the Bethesda real estate lawyer.

Even though title insurance has been a staple of real estate transactions for more than a century, the industry is still finding ways to expand its product line. In the late 1990s, insurers began offering deluxe, or ALTA-extended, policies that offer coverage for liabilities not traditionally covered, including problems that arise after a deed is issued.

Cliff Morgan, chairman of title insurance forms for ALTA and an underwriting executive in First American's home office in Santa Ana, Calif., is credited with developing this type of insurance.

What kind of problems are covered? As an example, Morgan said, sometimes a homeowner can get a letter threatening foreclosure because payments aren't being made on a loan -- a loan that an identity thief took out on the house, without the true owner's knowledge. "Yes, that does happen," he said. "More than people would believe."

With a regular policy, the homeowner would have to persuade the lender to release the mortgage or file a suit for "quiet title," under which a court will establish the ownership of the property. With extended coverage, the title insurance company will handle the problem, Morgan said.

Enhanced policies also provide coverage for zoning violations, such as illegal curb cuts, and encroachment issues, which are often triggered by boundary line disputes over additions built without permits.

The cost of title insurance depends on the value of a property. The exact amount varies among insurers and jurisdictions, but would run about $1,625 for a $500,000 home in Maryland at Chicago Title. In Virginia, a Lawyer's Title standard policy costs $1,750 for a $500,000 house. In the District, rates are higher -- First American would charge $2,250 for a $500,000 house.

Enhanced policies cost 20 percent more than a standard policy in most cases.

Whether the additional coverage is worth the price is unclear, said Birny Birnbaum, executive director of the Center for Economic Justice, a Texas nonprofit group that does consumer advocacy work on insurance and other financial issues. He also thinks that many of the events covered by extended coverage should already be included in standard coverage. "I think the standard policy should have more protection for consumers," he said. "The main point I want to make is that it seems unclear why this extended coverage requires this 20 percent bump."

Birnbaum, an actuary by trade, pointed out that payoffs for title insurance have traditionally been low compared with the cost -- about 5 percent of premiums collected, on average.

"I haven't seen any evidence that the claims on the extended policy are anything other than marginally greater than on the standard policy," Birnbaum said. "The extra amount the companies are charging doesn't seem to be warranted by the additional losses."