A lawsuit filed in a federal court in Washington State alleges that title insurance companies are colluding illegally to keep prices artificially high and are gouging consumers who buy and sell homes. A homeowner filed the lawsuit in U.S. District Court in Tacoma in March. It was alleged that the rates that homeowners “are charged are grossly out of proportion to what it costs to write title insurance.” The lawsuit seeks class-action status and could take in “hundreds of thousands, if not millions of consumers.”
Most folks really don’t understand how title insurance works. Quite often, it’s one of the larger costs involved in home transactions and is highly profitable for insurers. It protects against complications — such as forged signatures on title transfer documents and unpaid real estate taxes or other liens on the title — that already exist, but do not become known until after sales close. Borrowers typically are required to buy a policy to protect their lenders, while sellers generally buy one for the buyer.
Title insurers eliminate most of their payout risk through public-record searches that are now easier and quicker to get done than ever. In reality, the risk is very small. For example, payouts from title insurers doing business in Washington equaled, on average, 4.7% of the total premiums they collected in 2006, according to the state Office of the Insurance Commissioner. That’s far less than the average payouts of 84% of premiums for accident and health insurers, and 57% for property and casualty insurers.
Title insurers don’t have to compete on price, because the people deciding which company to use typically are real estate agents, lenders and builders. The consumer paying for the policies has little – if any – choice in the matter. The lawsuit alleges that title insurers actually have agreed not to compete on price in many states, including Washington, and collectively set rates in some states, such as New York. Currently there are pending lawsuits in several states similar to the new one in Washington. I wouldn’t be surprised to see more lawsuits being filed.
Title insurers should be required to justify rates with actuarially sound data, and post rates and fees on their Web sites. Regulation over rates is a necessity. Under a new law in Washington, the Insurance Commissioner has significant new authority over their rates that better aligns with our authority over other lines of insurance. Rates in that state must now be justified in order to be approved by the Insurance Commissioner. The lawsuit also says title companies win business by setting up affiliates in which large real estate brokerages have an ownership stake and, therefore, get a share of the profits. The new lawsuit alleges that title insurers engaged in illegal anti-competitive practices that kept rates artificially high. The suit names as defendants:
We will follow the course of this litigation closely and see what develops.
Source: Seattle Post-Intelligencer
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