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  • A Brief History of Title Insurance

  • If we look back more than a century, we find that it was common practice whenever one sought a form of assurance about a purchase of, or loan secured by, real estate, to consult a lawyer and obtain their legal opinion as to the status of title to real estate. But what if the lawyer was wrong? There are a number of court decisions beginning about 150 years ago which in essence hold that a lawyer is liable for an erroneous title opinion only if he is negligent in preparing and giving the opinion and that even if he is so liable, damages are limited in many cases to the amount paid for the opinion. In many states, there are similar opinions concerning abstractor's liability and certainly both lawyers and abstractors continually seek to limit their liability whenever possible1. Title insurance was created in response to the unmet need for reliable assurance of title and indemnification of loss caused by errors in reporting the status of title.

    Title insurance has the unique distinction of being the only form of insurance invented in the United States2. Some people say that the first title insurance company, the "Law and Property Assurance Society," existed in Pennsylvania as early as 1853. Not only did it insure against defective titles, but it also guaranteed the repayment of loans and mortgages3. A plan for insuring both titles and mortgages by the "Title Warranty Company" was published in Pennsylvania in 18714 just three years after the landmark decision in Watson v. Muirhead, 57 Pa.161 (dealing with abstractor's liability). A few consumer-oriented writers have suggested that the title industry, from the very beginning, was created by the need to protect abstractors and non-attorney conveyancers against their own legal liabilities - in other words, to protect the insurer rather than the insured5. However, that view of the industry ignores the fact that from the very beginning coverage was provided not only for matters which were of record (and should have been found by an abstractor and/or noted by an attorney), but also against "hidden" matters which were not of record (such as forgery, fraud, incompetency, etc.).

    In 1874, Pennsylvania enacted the first statutes authorizing the issuance of title insurance6. The Lawyers Title Insurance Corporation was formed under that enabling legislation in 1876 and during the following ten years, title insurance companies were established in many of the major cities on the East Coast of the United States, including New York, Philadelphia, Baltimore, and Washington, D.C. In 1895, a standard treatise on insurance mentioned the recently organized title insurers "which generally unite with title insurance an extensive and rapidly increasing business of searching titles"7. In 1909, a later version of that same text was changed to read, "these special kinds of insurance have assumed a commercial importance so great that they must receive more than passing notice".

    During the first quarter of the twentieth century, title insurance competed with land registration systems which, at that time, became very popular. From 1900 to 1922, some 22 states adopted a Torrens or similar land registration system8. However, between the First and Second World Wars, the title insurance industry began to create a national market for their policies and title insurance became the preferred product/system. The insurers were able to convince third-party lenders that title insurance was necessary for the financing of residential properties9. As the nationwide market for residential mortgages grew, title insurance policies helped to standardize mortgages thereby assisting lenders in selling the mortgages at a discount in the fledgling national secondary mortgage market10. The increasing use of title insurance was accelerated by the federal government's intervention in the housing markets of the 1930's as residential loans evolved into longer terms, amortized principal and interest and lower rates. In fact, in some states title insurers became mortgage lenders. By 1940, title insurance was the predominate form of title assurance on residential transactions in most urban areas and throughout many regions11. It also became routine to insure title in many large commercial transactions12.

    The emergence of organizations such as F. N. M. A. served to both stimulate business and to standardize the basic forms of coverage in most states. The American Land Title Association (ALTA) worked closely with lender counsel groups to develop the most popular policy form - the ALTA Loan Policy. In many states, it is common practice to insure the lender but not the owner or purchaser. Loan policies are the primary product of this industry.

    The building booms that followed World War II accelerated the growth of the title insurance industry. For instance, according to the New York Insurance Department13, the total premiums and other fees reported by all title insurers for 1944 were $4.8 million and for 1952 were $13.9 million. Twenty-five years later, the industry's total operating revenues topped the $1.0 billion mark for the first time14.

    History of Regulation of the Title Insurance Industry

    The very nature of the insurance business creates a strong public interest in every aspect of that business. The basic concept of security for policyholders requires that the companies receiving the premiums remain in business and establish adequate reserves in order to be able to fulfill the contract of indemnity if and when an insured loss occurs. The public interest is served when regulation of the insurance industry creates this security.

    The authority of a state to regulate insurance companies doing business within its boundaries has never been in doubt. States normally exercise this authority primarily by licensing both domestic and foreign (domiciled in another state) insurance companies. Generally, state legislatures have created an insurance department and have established minimum requirements for licensing insurance companies and their agents. Most states also require insurance companies and their agents to utilize rates and forms which have been either established by the insurance department or filed by the company or agent with the insurance department (and presumably approved). Most states also collect a tax on premiums written within the state or on property located within the state. Although title insurance is unique in many ways, it is no exception to these general concepts.

    Because it was regulated on the state level, the insurance industry was generally not subject to federal regulation until 1944. The United States Supreme Court had previously held that the business of insurance was not commerce15 and, therefore, not subject to federal regulation under the interstate commerce clause of the Constitution or federal antitrust laws. However, in 1944 the Supreme Court reversed itself16 by holding that (a) an insurance organization conducting a substantial portion of its business across state lines was engaged in commerce, and (b) the Sherman Anti-Trust Act applies to the insurance industry. That case (Southeastern Underwriters) was a criminal prosecution against an organization of five insurance companies doing business in Georgia and other southeastern states; the defendants were charged with price fixing and conspiracy to monopolize trade.

    In response to the Southeastern Underwriters' case, Senators McCarren and Ferguson introduced a measure passed by Congress and signed by the President on March 9, 1945. Public Law 15 declared a moratorium until January 1, 1948, during which time the Sherman, Clayton, Robinson-Patman and Federal Trade Commission Acts would not apply to the business of insurance. After January 1, 1945, and to this date, those federal antitrust acts apply to the business of insurance "to the extent that such business is not regulated by state law". Thus, state regulation should exempt insurance from these federal antitrust acts.

    The Real Estate Settlement Procedures Act of 197417 was designed to cause purchasers of residential real estate to receive "timely information on the nature and costs of the (real estate) settlement process" and to also protect such purchasers against "unnecessarily high settlement charges" in connection with any "federally-related mortgage loan". The act prohibits fee splitting and undisclosed rebates or kickbacks, limits the amount of funds lenders can require to be escrowed for ad valorem taxes and property insurance and requires lenders to distribute consumer information booklets to borrowers. The prohibition on rebates and kickbacks was intended as an "antitrust" provision where reverse competition is involved; no anti-competitive result need be shown under this provision which is popularly known as "RESPA Section 8." Since the Act contains a very broad definition of "settlement services" as well as "federally-related mortgage loan" which clearly encompasses most of the activities of title insurers and their agents involved in the closing and insuring of residential real estate loans, RESPA regulates the business of title insurance to the extent it applies to those activities and loans. In short, RESPA applies to most residential real estate loan closings.

    Most states have always considered title insurance to be a branch of the insurance industry; however, some regulate title insurance under banking laws and regulations18. Most states have not yet applied comprehensive regulation to title insurance but have established minimum capitalization, a paid-up surplus and minimum amounts of reserves to pay losses. Some states have also established maximum and/or minimum investment requirements in title plants and have limited the size of any single risk which a title policy might assume (without reinsurance).

    The majority of states now limit title insurance companies to a "single line" and do not permit them to issue other types of insurance (property, casualty, life, health, surety, bonds, mortgage guaranty, etc.) In the 1930's, many title insurers which were also guaranteeing the payment of mortgage loans became insolvent as a result of claims under the guarantees, and state legislatures passed these "single line" requirements to prevent a reoccurrence.

    All states now prohibit the transaction of title insurance without a license. Some states have prohibited rebates or discounts for more than 30 years. Others prohibit title companies from the practice of law and/or conveyancing. In the 1970's, there were a number of skirmishes between state and local bar associations and factions of the title industry wherein each sought to limit the other from intrusions into their vocational territories.

    Concerning regulation of title insurance rates, the majority of the states have been and continue as "use and file" jurisdictions where the insurer merely establishes its rates from time to time, charges those rates to the public and then files them (almost as a notice) with the insurance department. This was the original concept of regulating rates. The second largest group of states are "file and use" jurisdictions where the insurer is required to file its rates (and in many states, its justification for those rates) prior to implementing the rates. In many cases, "file and use" states have a 15 or 30-day deemer provision that grants the state a short period of time in which it must reject the proposed rates for cause or else the rates are deemed to be effective and approved. This was the second step in the evolution of rate regulation.

    Many "file and use" states had authorized rating bureaus wherein title insurers pooled their statistical data and authorized the bureau to file rates for all of the member companies. However, the use of rating bureaus was discontinued by most title insurers in the mid-1980's as a result of federal antitrust21 litigation alleging that title insurers had engaged in a price-fixing conspiracy in 13 states where there were authorized rating bureaus. While that litigation was pending, the U. S. Supreme Court decided Southern Motor Carriers19 which expanded the state action immunity doctrine and caused a negotiated settlement of the pending title insurance litigation. Nonetheless, only a few rating bureaus are active today in the title insurance industry because of antitrust considerations.

    A third, smaller group of states now simply requires that title insurance rates "not be unreasonable". The last and smallest group of states, promulgates either rates to be paid to the insurer only or the "all-inclusive" rates to be paid by the public for both the abstracting and examination functions and the insuring functions. Texas and New Mexico, part of the latter group, require both agents and insurers to submit annual statistical data to the state for analysis and use in establishing rates. Both states hold annual or biannual public hearings to establish all-inclusive rates for the coming year.

    1. Roberts, Title Insurance: State Regulation and the Public Perspective, 39 Ind. L. J. 1, 5-7.
    2. Davenport, Title Insurance, 1 Examination of Insurance Companies 309 (N. Y. Ins. Dept. 1953).
    3. Francis, Annals of Life Insurance 291 (1853).
    4. 1 Joyce, Law of Insurance 59 (1917); see also Special Committee of the Hennepin County Bar Association Appointed to Study Title Insurance, Report, 19 Minn. L. Rev. 354, 357 (1935).
    5. E. Roberts, et al., Public Regulation of Title Insurance Companies and Abstractors 1 (1961).
    6. Hapgood, The Screwing of the Average Man 90-93 (1974).
    7. Richards, Law of Insurance 14 (2d ed. 1895).
    8. B.Burke, American Conveyancing Patterns 108 (1978).
    9. Viele, The Problem of Land Titles, 44 Pol. Sci. Q. 421, 430-431 (1929).
    10. Gage, Land Title Assuring Agencies in the United States, 58-81 (1937).
    11. Rooney, Title Insurance: A Primer for Attorneys, 14 Real Prop. Prob. & Tr. J. 608, 608 (1979).
    12. Kalkin, Commercial Title Insurance and the Lawyer's Responsibility, 15 Real Prop. Prob. & Tr. J. 557, 557-558 (1980).
    13. Gray, Title Insurance Companies, 4 Examination of Insurance Companies 227, 230 (N. Y. Ins. Dept. 1954).
    14. Research Committee of the Am. Land Title Assn., The Title Insurance Industry (pages are unnumbered).
    15. Paul v. Virginia, 75 U. S. (8 Wall.) 168 (1868).
    16. U. S. v. Southeastern Underwriters Assn., 322 U. S. 533 (1944), 323 U. S. 811 (1945).
    17. 88 Stat. 1724 (1974), 12 U. S. C. Section 2601 (1983).
    18. Kentucky, Missouri, Rhode Island, Vermont and Washington, D. C.
    19. In re Real Estate Title and Settlement Servs. Antitrust Litig., 1986-1 CCH Trade Cases 67,149 (E. D. Pa. June 10, 1986).