Insurance Untangles Ownership
Hot Market Has Created Rise in Title Problems

By Elizabeth Festa
Special to The Washington Post
Saturday, February 25, 2006

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.

When lenders write mortgages, they require that the borrower buy title insurance that covers the lender. The borrower can buy a separate owner's title insurance to cover his own risks.

Title insurance is issued after a search of public documents -- including old land records, tax liens and court judgments -- shows the property is owned free and clear. An owner's policy is designed to protect the buyer's interest in the property against a range of challenges. In cases of total or partial failure of title, if coverage applies, the buyer is made whole financially and the insurer pays any attorney's fees and court costs.

Title claims occur from situations ranging from the pedestrian to the scandalous.

One day last spring, D.C. title agent Jim Duley of Monarch Title at Eastern Market was examining the survey for a rowhouse the day before closing. On it, he noticed a new garage-door opener at the rear, even though from the survey the property appeared to be "landlocked," and provided no vehicular access.

Further investigation showed that behind the roll-up garage door was a five-foot deep parcel of land last owned by one Benjamin Carpenter, who had subdivided this land back in 1887. Taxes had been unpaid for years and no heirs had been found. The lot was indistinguishable from the public alley, both of which had been recently rebricked by the District.

The concern: Someone could buy the tiny lot in a D.C. tax sale and hold the owner hostage by demanding an exorbitant price for alleyway access to the property, as sometimes happens in the District, Duley said.

The would-be buyers got cold feet and withdrew their bid, Duley said. The house was put back on the market in September with a disclosure noting the sellers' intentions of obtaining a tax deed to the lot for the future buyer .

With the escalation of D.C. real estate prices in recent years, parking spots have a premium value. It is not unheard of for opportunists to take advantage of unclaimed alley and backyard-access parcels in older parts of the District, Duley said.

A bloodier battle concerned a murder case in Great Falls. Edward Y. Chen pleaded guilty to three counts of first-degree murder in 2002 after murdering his parents and brother seven years earlier. But in the years before he was arrested, he had assumed his brother's identity and sold five Northern Virginia houses. The complex title situation, where five families filed suits to clear the titles to their homes, resulted in a settlement that cost the title insurers more than $1 million.

According to the American Land Title Association, the first title insurance company was formed in 1876 by a group of Philadelphia "conveyancers," who searched land histories and issued opinions on title to ensure financial protection against the same challenges that arise today, including forgeries, hidden liens and encumbrances.

The title association estimates that 25 percent of title searches yield problems that title companies need to fix, usually unbeknown to the consumer or lender.

Title problems can lurk for years. First American usually does a 60-year search before issuing a new title policy. Land records are on file at area courthouses back to the 1700s. There is one 1799 deed at Montgomery County's Land Records Division denoting a property's legal description with the term "Wheel of Fortune."

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."