Most of these comments stem from a deep misunderstanding of the product and, too often, are merely a regurgitation of the opinions that predominant the conventional wisdomp
While ownerâ€™s title insurance is optional to a homebuyer, we rarely hear homebuyers bemoan the fact that they are required to obtain homeownerâ€™s insurance. Â The average ownerâ€™s title insurance premium paid by homebuyers to cover a Bethesda, MD property costs $962 as a one-time premium without a deductible, while homeownerâ€™s insurance would cost that same homebuyer $879 annually with a $500 deductible.
In other words, over a period of ten years of homeownership, that same homebuyer/homeowner would pay $962 for ownerâ€™s title insurance but pay $8,790 for homeownerâ€™s insurance.
Yet, rarely do we hear complaints about the required homeownerâ€™s insurance coverage. Â But why?Â
Here are the stats that give rise to the negative chatter over ownerâ€™s title insurance
According to the Insurance Information Institute, 6 percent of insured homes had a claim against the homeownerâ€™s insurance policy compared to less than 1 percent ofÂ title insurance policy holders. Â Moreover, in 2009 the homeownerâ€™s insurance industry paid out roughly $0.87 Â for every $1 in premium; whereas, the title insurance industry paid out only $0.05 Â for every $1 in premium.
These statistics on their face â€“ without an understanding of title insurance as a "risk elimination" line of indemnity insurance â€“ raise eyebrows.
Further, these statistics would lead one to assume that the title insurance industry is a far more profitable industry than the homeownerâ€™s insurance industry when, in fact, the opposite is true. Â As of 2008, the top three title insurance underwriters lost money while the top three homeownerâ€™s insurance companies were profitable.
But here is the rub
Title insurance is not homeownerâ€™s insurance. Â Title insurance is about "risk elimination" of title problems arising from past events and not "risk assumption" of future events.
According to the American Land Title Association, 25% of properties have a title defect that requires clearing and curing title prior to closing and, in most cases, this work is performed and cured without the parties to the transaction ever knowing about it.
The cost for this work is paid with title insurance premiums; both to the title agent in the form of commissions and to third-party service providers for reviewing and clearing title. Â Title insurance premiums also pay for the cost of maintaining accuracy of title plants and other title records.
So, in addition to paying out claims for human error or fraud by a seller or prior homeowner, the title insurance premium also covers work performed for eliminating the risk of a title defect.
Before the advent of title insurance, homebuyers hired and paid attorneys to review title, cure title, and issue an attorneyâ€™s opinion title. Â If the attorney erred, the homeowner could make a claim against the attorney â€“ assuming the attorney had not since been disbarred for malpractice.
In this modern world, the homeowner has the option of purchasing ownerâ€™s title insurance for which they can rely on the title insurance underwriter (or, in the event of a defalcation or bankruptcy, itâ€™s regulating state insurance commission) to make good on a claim.