March 15, 2010
By: Janet L. Kaminski Leduc, Senior Legislative Attorney
You asked a series of questions about title insurance. We address your specific questions and then provide a background on title insurance. The Office of Legislative Research is not authorized to render legal opinions and this report should not be considered one.
Why are attorneys the only type of agent who does not have to be licensed and trained to sell insurance in Connecticut?
By law, a title insurance agent must be a practicing attorney, unless he or she held a valid title insurance license on or before June 12, 1984. The provision was enacted in 1984 (PA 84-403).
We searched the legislative history for PA 84-403 (sSB 375). It did not reveal the reasons for this provision. But there was an amendment called in the House that would have struck this provision from the bill, but it was defeated and the bill passed. The proponent of the amendment (Representative Chase of the 120th district) thought that requiring a title agent to be an attorney would raise the cost of purchasing a home. In opposition to the amendment, Representative Noonan (70th district) said the requirement was necessary to maintain the public's confidence in transferring homes, referring to the high standards that attorneys would maintain in ensuring “land records will be kept clean.” He also asserted that costs could rise if nonattorneys were careless in writing title insurance, undermining the confidence in the property title.
The bill passed the Senate on the consent calendar.
With respect to licensing and training, CATIC (a title insurance company domiciled in Connecticut) points out that attorneys are trained in law school, have to pass the bar exam and submit to a criminal history check, and are licensed by the Connecticut Superior Court. Attorneys' practices are regulated by the Rules of Professional Conduct and are subject to random audit. As title agents, they must also comply with state law.
Do attorneys hold an unfair monopoly in Connecticut by being the only statutory entities that can issue title insurance?
We asked the Insurance Department this question. While they believe some may argue this to be true, title insurance is such a unique product that others argue it requires an attorney to properly perform the functions of a title agent. The General Assembly appears to have agreed by enacting PA 84-403.
A title agent's responsibilities include performing a thorough title search by reviewing documents affecting a particular property, including affidavits, hold harmless agreements, liens, land surveys, and zoning permits, among others. The agent examines the condition of the title, evaluates the insurability of the property, and attempts to clear any defects. The agent often transcribes the property's legal description and enumerates easements and other special property rights for inclusion in the policy.
Are attorneys unjustly enriched by earning 60% commission?
According to the Insurance Department and CATIC, the 60% commission cap, which is set by statute, is among the lowest title agent commission in the country. In most other states, where commissions are not set by statute, title agents receive 70% to 90% of premium as commission (J. Robert Hunter, Title Insurance Cost and Competition, Testimony before the House Committee on Financial Services Subcommittee on Housing and Community Opportunity, April 26, 2006).
The commission reflects the fact that title agents do more than just place business with an insurer. Rather, they perform the underwriting functions; perform searches of land, court, and municipal tax office records; resolve known defects in the title; and prepare the insurance policy.
Have consumers been harmed by unnecessarily rising title insurance cost?
The Insurance Department has no information on rising title insurance costs. CATIC says title insurers have not raised rates for title insurance in almost 20 years.
By law, title insurers must file proposed premium rates with the insurance commissioner for his approval and make the rates publicly available. The rates cannot be inadequate, excessive, or unfairly discriminatory. Rates are excessive if, in the aggregate, they are (a) likely to produce a long run profit that is unreasonably high in relation to the business risk or (b) unreasonably high in relation to the services rendered.
If the legislature established a free market for title insurance, would consumers benefit from lowered policy cost?
The Insurance Department believes that due to the unique nature of title insurance, deregulating the market would likely not lower total costs to consumers. CATIC points out that there is basically a free market already in that there are low barriers for entry (e.g., $500,000 capital required for licensure). Additionally, while title insurance is a highly concentrated market, there have been new entries to the market in recent years, making it relatively more competitive. According to the Insurance Department's website, there are 17 licensed title insurance companies doing business in Connecticut.
Do state statutes adequately protect consumers from attorneys who make errors as a title agent?
According to the Insurance Department, the existing statutes, court decisions, and Judicial Branch oversight of attorneys appear to adequately protect consumers. CATIC notes that if attorneys violate the Rules of Professional Conduct or state laws, they are subject to discipline or arrest.
Are state statutes clear enough as to who is responsible for attorneys when they act as both title agent and client's counsel?
According to CATIC, the Judicial Branch has oversight of attorneys, who must follow the Rules of Professional Conduct. The rules specify that an attorney has a duty to (1) charge, and fully disclose, reasonable fees; (2) keep clients reasonably informed; and (3) disclose conflicts of interest. An attorney is also prohibited from allowing his or her own interests or obligations to third parties to adversely affect a client. The rules are available from the Statewide Grievance Committee's website (http://www.jud.ct.gov/SGC/) under legal and educational resources.
Title insurance is a unique and complex insurance product. It indemnifies for existing (but unidentified) or specifically underwritten defects in a property's title.
Connecticut law defines “title insurance policy” as a contract insuring or indemnifying against loss or damage arising from (1) existing (i.e., present on or before the policy effective date) defects in, or liens or encumbrances on, the insured title; (2) an unmarketable title; or (3) invalid or unenforceable liens or encumbrances on the property (CGS § 38a-402(15)).
Each bank must annually adopt a policy describing its standards for accepting loan applicants and issuing loans, including title insurance requirements (CGS §§ 36a-260(b) and 36a-261(d)).
There are two types of title insurance policies: lender and owner.
A mortgage lender usually requires title insurance to protect the lender against loss resulting from claims against the mortgaged property. Thus, it requires a borrower to purchase a lender's policy when taking a mortgage loan. Coverage under a lender's policy is usually based on the dollar amount of the loan. It protects the lender's interests in the property if there is a problem with the title. The coverage amount decreases each year until the loan is paid off.
The federal Real Estate Settlement Procedures Act (RESPA) prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
The premium for the lender's policy will be listed on the HUD-1, the standard settlement form RESPA requires. The HUD-1 itemizes the costs to the seller and purchaser related to the transaction, including title insurance.
Owner's title insurance is optional and usually issued in the amount of the real estate purchase. Coverage lasts as long as the purchaser or the purchaser's heirs have an interest in the property. The American Land Title Association (ALTA) indicates on its website (http://www.alta.org/consumer/questions.cfm) that “only owner's title insurance fully protects the purchaser should a problem arise with the title that was not uncovered during the title search.” An owner's policy also pays for legal fees incurred in defending a title claim.
If the purchaser agrees at the closing to buy the optional owner's policy, the premium will be listed on the HUD-1. It is less expensive to buy an owner's policy at the same time, and through the same insurer, as the lender's policy.
Title Insurance Disclosures Required in Connecticut
If a title insurer or agent issues a lender's policy simultaneously with the purchase of residential property securing the mortgage loan and an owner's policy has not been requested, the insurer or agent must inform the borrower that the lender's policy does not protect the borrower and that he or she may obtain an owner's policy. This notice must be provided in writing before loan proceeds are disbursed and before the lender's policy is issued (CGS § 38a-423(a)).
If the borrower elects not to purchase an owner's policy, the insurer or agent must obtain a written statement from the borrower that he or she received notice and waives the right to purchase an owner's policy. If the borrower refuses to provide the statement, the insurer or agent must note that in the file. The statement and waiver must be on a form that the insurance commissioner prescribes and the insurer or agent must retain it for at least five years (CGS § 38a-423(b)).
The law does not provide a specific penalty for failing to provide the notice or to obtain a waiver. Thus, the insurance law's general penalty applies. Any person or corporation violating any provision of Title 38a of the Connecticut general statutes for which no other penalty is provided will be fined up to $15,000 (CGS § 38a-2).
Title Insurance Agent
Under Connecticut law, a title insurance agent must be a practicing attorney, unless he or she held a valid title insurance license on or before June 12, 1984. An agent is:
any person authorized in writing by a title insurer to (A) solicit title insurance business, (B) collect premiums, (C) determine the insurability of a risk in accordance with underwriting rules and standards prescribed by the title insurer or (D) issue policies of the title insurer. Title agent does not include officers or employees of a title insurer (CGS § 38a-400(13)).
A title insurance agent's responsibilities include performing a thorough title search by reviewing documents affecting a particular property, including affidavits, hold harmless agreements, liens, land surveys, and zoning permits, among others. The agent examines the condition of the title, evaluates the insurability of the property, and attempts to clear any defects. The agent often transcribes the property's legal description and enumerates easements and other special property rights for inclusion in the policy. Because the policy insures against unknown defects at the time title is transferred, the title search and evaluation are extremely important for mitigating future claims under the policy.
Title Agent's Commission
The law prohibits an insurer from paying a title insurance agent more than 60% of the gross policy premium. It also prohibits an insurer from increasing a title agent's commission directly or indirectly by providing anything of value, including services, to an agent for less than the actual cost or fair market value (CGS § 38a-415(b)).
Title Insurance Premium Rates
Title insurers must file proposed premium rates with the insurance commissioner for his approval (CGS § 38a-419). Each title insurer and title agent must make currently effective premiums and charges available to the public (CGS § 38a-420).
By law, the rates must comply with the following standards (CGS § 38a-418):
1. Rates cannot be inadequate, excessive, or unfairly discriminatory.
2. Rates are excessive if, in the aggregate, they are (a) likely to produce an unreasonably high long run profit in relation to the business risk or (b) unreasonably high in relation to the services rendered.
3. Rates are inadequate if (a) they are clearly insufficient, together with investment income attributable to them, to sustain projected losses and expenses or (b) their continued use will unfairly have the effect of substantially lessening competition or creating a monopoly.
4. Rates are unfairly discriminatory if the premium charged for any classification is not reasonably related to the services performed or risks assumed by the insurer (but within rate classifications premiums may, to a reasonable degree, be less in the case of smaller insurances and the excess may be charged against larger insurances, without rendering the rate unfairly discriminatory).
In making or reviewing rates, due consideration must be given to (1) past and prospective loss experience; (2) exposure to loss; (3) underwriting practice and judgment; (4) past and prospective expenses, including amounts paid to or retained by title agents; (5) investment income; (6) a reasonable margin for profit and contingencies; and (7) all other relevant factors both within and outside of Connecticut. A five-year experience period is required for all filings of rates, but a filing from an insurer that has been in existence for less than five years must be supported by experience consistent with the period of its existence.
The law authorizes the insurance commissioner to adopt regulations setting forth guidelines for evaluating rates, although none have been adopted to date. Regulations may include consideration of (1) costs of underwriting risks the insurer assumes; (2) amounts title agents are paid or retain; (3) the insurer's operating expenses, other than underwriting and claims expenses; (4) claim-related expenses; (5) investment income; (6) reasonable profit; (7) premium taxes; and (8) any other factors the commissioner deems relevant (CGS § 38a-418(f)).