Imagine this scenario. You have finally saved
up enough for a down payment. You've scoured
the listings. You've fought through the brutal
bidding wars. And against all odds, you finally
find it. The one. You go through the endless
paperwork. You sign your name about 100 times
at the closing table until your hand cramps.
And you get the keys. You move in. The dream.
Exactly. You paint the walls that perfect shade
of greige. You start imagining your kids growing
up in the backyard. And then, six months later,
there is a knock on the door. It's not a neighbor
bringing cookies. Oh, no. It's a stranger holding
a piece of paper that says they actually own
the land your house sits on. Or maybe it's a
tax collector saying there was a massive unpaid
debt attached to the property from three owners
ago, and they're here to collect or foreclose.
It sounds like the plot of a horror movie for
suburbanites, doesn't it? Yeah. It triggers that
primal fear of displacement. But this is actually
the fundamental risk that underpins the entire
American real estate market. It is. It's the
nightmare scenario that created the industry
we are diving into today. It is terrifying. And
today, we're unpacking something that almost
every homeowner pays for, but almost no one actually
understands. Yeah. We are talking about title
insurance. Right. And look, I know what you're
thinking. I can hear the collective sigh through
the headphones. Insurance. Really? We're doing
a deep dive on insurance. But trust me, the story
behind this is wild. It involves a 19th century
legal drama, a fundamental split between how
the U .S. and the rest of the world handle property,
and a system that is designed to look backwards
rather than forwards. It really is fascinating
when you dig into it. Title insurance is technically
a form of indemnity insurance. It is predominantly
found in the United States and Canada, which
is the first clue that we are dealing with something
unique to our legal system. That's a good point.
Its purpose is to insure against financial loss
from defects in the title to real property or
from the invalidity of mortgage loans. But unlike
other insurance, it's not about probability.
It's about history. Right. And usually when we
buy insurance, like for a car or a toaster or
our health, we're worried about what might happen
in the future. Will I crash the car? Will the
toaster explode? Will I get sick? You're betting
against the future. Exactly. Yeah. But title
insurance is different. It's worrying about what
already happened that you just don't know about
yet. It's like buying insurance against having
a secret evil twin you never knew about. That's
a colorful way to put it, but yes. Unlike buying
a toaster, which is a fresh object off a factory
line, land ownership has a long tale of history.
That plot of land has been owned, sold, divided
and borrowed against for potentially hundreds
of years. The mission of this deep dive is to
explore why this specific financial product exists
to manage that history, the legal case in the
1800s that sparked it, and why, as you mentioned,
the U .S. system of property ownership is fundamentally
different from the vast majority of the industrialized
world. So we have a stack of sources here to
guide us. We're doing a deep dive primarily into
the comprehensive Wikipedia entry for title insurance,
but we're also pulling on legal analyses of the
Watson v. Muirhead case, historical records regarding
the Torrens system, and industry reports on...
loss ratios a lot to unpack a whole lot yeah
so let's get into it where did this all begin
because people have been buying land for a long
time long before 1876 how did they do it back
then they have and for a long time the rule of
the land was a latin phrase you are probably
familiar with caveat emptor buyer beware buyer
beware it sounds harsh but that was the legal
reality Prior to the invention of title insurance,
if you were buying real estate, you bore the
sole responsibility for ensuring the validity
of the land title held by the seller. All on
you. All on you. You had to do the homework.
If the title turned out to be invalid later,
maybe it was fraudulent. Maybe there was a long
lost heir who suddenly returned from the war.
The buyer lost their investment completely. That
seems incredibly high stakes. You could pay for
a farm, work the land for a decade, and then
poof, it's gone because of a paperwork error
50 years ago. There was no safety net. None.
If the title is bad, you didn't own the land,
period. It's as simple as that. And that high
stakes environment leads us directly to the catalyst
case. It's a Pennsylvania Supreme Court case
from 1868 called Watson v. Muirhead. Watson v.
Muirhead. This is the origin story. Okay, set
the scene for us. Who is Watson and who is Muirhead?
What are we talking about here? So Watson is
our plaintiff. He's an investor looking to buy
some real estate in Philadelphia. He's doing
what savvy investors do. He's trying to be careful.
He's not just throwing his money around. Right,
he's doing his due diligence. Exactly. Muirhead
is the defendant and he is a conveyancer. Now
we... don't really have conveyancers in the same
way anymore. But in the 19th century, a conveyancer
was the professional you hired to handle the
transfer of property. So like a mix between a
title searcher and a closing agent today? That's
a great way to think about it. Yes. So Watson
hires Muirhead to check the title on a property
he wants to buy. Standard procedure. Check the
records. Make sure I'm good to buy this. Here's
your fee. Right. Now, here is where the drama
starts. Muirhead actually did his job. He scoured
the records and he found something. He found
a prior judgment lien on the property. A lien,
just to clarify for everyone, that's a legal
claim, right? A debt attached to the property
itself. Yes. A lien is essentially a legal claim
on assets, which allows the holder to obtain
access to the property if debts aren't paid.
So if the previous owner owed money, the creditor
puts a lien on the house. If the debt isn't paid,
the creditor can take the house. OK, so Muirhead
sees this. He's not asleep at the wheel. Not
at all. He sees this judgment lien. He doesn't
ignore it. But conveyancing law is tricky. He
wants to know if this specific lien is actually
enforceable against the property Watson wants
to buy. So he goes to a lawyer. He calls in the
cavalry. Smart move. He consults a prominent
attorney and asks for a professional opinion.
He asks, is this lien valid? Is it going to be
a problem for my client? And what did the lawyer
say? The lawyer erroneously determined that the
Linn was not valid. He looked at the statutes,
looked at the judgment, and gave his professional
opinion that it wasn't a threat. He basically
said it was junk paper. Oh. So, armed with this
legal opinion from a respected lawyer, Mirrorhead
goes back to Watson and says, the title is clear.
I found a Linn, but my lawyer says it's garbage.
Go ahead and buy. I think I see where this is
going. It's not going to a happy place. Watson
buys the land. He buys the land. He puts his
money down. And of course, the lawyer was wrong.
The limb was valid. The creditors came calling.
They foreclosed on the property to pay the debt.
And Watson lost his investment. He was out a
significant amount of money. OK, so Watson is
sitting there. He's bought the land. He's presumably
happy. And then the creditors knock on the door
and say, actually, this land belongs to us to
pay off a debt. Watson loses the farm. Literally.
Literally. So naturally, he turns around and
looks at Muirhead, the guy he hired specifically
to prevent this very thing from happening. Right.
He sues Muirhead. The logic is simple. I paid
you to check the title. You said it was clean.
It wasn't. You owe me my money back. It seems
like an open and shut malpractice case. Please
tell me he won. Because if I paid a mechanic
to check my brakes, they said, you're good. And
then my brakes failed. I'm suing that mechanic
into oblivion. You would think so. It seems like
the most logical outcome. But the case goes all
the way to the Pennsylvania Supreme Court in
1868. And the judges, they pause. They look at
what Muirhead did. He found the lien. He didn't
hide it. He went to a lawyer, a prominent lawyer,
by the way, and asked for an opinion on that
lien. The lawyer said, don't worry about it.
So Muirhead got bad advice, passed it on to Watson,
and Watson paid the price. Exactly. And the court
ruled that because Muirhead acted in good faith
and followed the standard custom of consulting
a lawyer, he was not negligent. He made a mistake,
yes, but it was an honest mistake. An honest
mistake. An honest mistake. And under the laws
of 1868, you couldn't be sued for an honest mistake
if you were following professional standards.
Muirhead was off the hook. That is... That is
wildly unsatisfying. That leaves Watson holding
the bag. He did everything right. He hired the
expert, he paid the fees, and he still lost his
investment with zero recourse. It was a shock
to the system. It sent a chill through every
investor in Philadelphia because it revealed
a terrifying gap in the economy. You could do
everything right and still lose. The aha moment
wasn't that conveyancers were bad at their jobs.
It was that negligence law wasn't enough to protect
capital. They didn't need a better lawyer. They
needed a financial guarantee that paid out even
if no one screwed up. I see. So if you can't
sue the conveyancer for an honest mistake, you
need a different product. You need an insurance
policy that pays out purely based on the fact
that you lost money, regardless of whose fault
it was. Exactly. They realized that professional
opinions weren't enough security for big financial
investments. The market saw a need and it responded
quickly. In 1874, the Pennsylvania legislature
passed an act specifically allowing for the incorporation
of title insurance companies. And just two years
later, in 1876, a group of colleagues met in
Philadelphia to form the very first one. And
what was it called? It was called, very creatively,
the Real Estate Title Insurance Company of Philadelphia.
I love literal naming conventions. We insure
real estate titles in Philadelphia. Done. No
marketing fluff. It gets the point across. Their
stated mission was to ensure the purchasers of
real estate and mortgages against losses from
defective titles, liens and encumbrances. He
promised that through these facilities, transferring
real estate would be speedier and more secure
than heretofore. Heretofore. I love 19th century
business speak. It sounds so formal. So who bought
the first policy? Do we know? Is that lost to
history? We do know, which is amazing. One of
the founders was a conveyancer named Joshua Morris.
The very first policy was purchased by his aunt.
Of course it was. Hey, Aunt Mildred, I've got
this new product for you. Something like that.
She bought a policy for a home on North 43rd
Street in Philadelphia. The home was valued at
$1 ,500. $1 ,500 for a house. I know, inflation
and all that, but still, that hurts to hear.
So, Joshua Morris' aunt is patient zero. for
title insurance. This solves the problem for
Americans. But you mentioned earlier that this
is largely a U .S. and Canada phenomenon. That's
right. Why didn't the rest of the world look
at this and say, hey, great idea, let's do that
too? Because they solved the problem a different
way. And this brings us to the really heavy conceptual
difference, recording versus registration. This
is probably the most important technical distinction
to understand about American property law. OK,
let's unpack this, because I think most people
assume that when they buy a house and record
the deed at the county courthouse, the government
is confirming they own it. That is the common
misconception. The U .S. uses a land recording
system. In a recording system, the government
is essentially a giant filing cabinet. A filing
cabinet. That's it. You bring a deed, they stamp
it, they index it, and they file it. The government
recorder does not read it to see if it's legal.
They don't check if the seller actually owned
the land. They don't check if the signature is
forged. They just file it. I want to stick on
this distinction because I think it's the hardest
part of this whole topic to grasp. When I walk
into a county clerk's office and I hand them
a deed, I assume they are checking it. Like if
I try to deposit a fake check at a bank, the
teller stops me. Right. You're saying the government
recorder doesn't do that? Not in the way you
think. Think of the U .S. system, the recording
system, like a bulletin board in a college dorm.
Okay, I'm with you. An analogy. I like it. If
I pin up a flyer that says I am selling this
bike for $50, the college doesn't verify that
I actually own the bike? They don't check the
serial number. They just provide the board and
the thumbtack. Exactly. The board is the public
record. If you buy that book and it turns out
I stole it, the college says, hey, we just own
the cork board. You should have checked. In a
recording system, the risk is borne by the user,
not the public. That is horrifyingly simple.
That is the U .S. system. That is the U .S. system.
Most of the rest of the industrialized world,
Europe, Australia, the UK, they use a land registration
system. It's often called the Torrens system,
named after Sir Robert Torrens, who developed
it in Australia. And how is the Torrens system
different? The Torrens system, which is what
Europe, Australia, and Canada use, is more like
the DMV. The Department of Motor Vehicles. Okay.
When you sell a car, you don't just pin a note
on a board. You go to the DMV. The DMV takes
the old title, cancels it, and issues a brand
new one in the new owner's name. The DMV guarantees
that the new title is valid. So the government
puts its stamp of approval on it and says, this
person now owns this thing. Yes. And if they
mess up, the state pays for it. They have an
indemnification fund. The government guarantees
the title. The risk is borne by the public. The
DMV model sounds infinitely safer. Why on earth
did we reject that? I see in the notes here that
we actually tried to switch to the DMV model
in the early 1900s. We did. This is a forgotten
chapter of history. Between 1896 and 1917, 19
U .S. states adopted some form of the Torrens
system. Minnesota, Massachusetts, New York, they
all gave it a shot. 19 states. That's a serious
effort. It was. They tried to move to a system
where the government guaranteed the title, which
on the surface seems so much more secure and
efficient for the consumer. But clearly it didn't
stick since I just paid for title insurance on
my house. What happened? Why did 19 states give
up on a better system? A few things happened.
First, there were disasters. There was a famous
case in Imperial County, California. A single
judgment regarding a title error was so massive
that it completely bankrupted the state's title
indemnification fund. Oh, wow. So the government
realized, wait. Backing all this land is expensive
and one big mistake can wipe us out. Exactly.
When the fund goes bust, the guarantee is worthless.
It showed the states the potential liability
they were taking on and it scared them. So financial
risk was a big part of it. But there must have
been more. There was a stronger force at play.
The lenders and the skyscraper argument. The
skyscraper argument. Is this about building heights?
It's about financing complexity. Carl Llewellyn,
a famous legal scholar, put it this way. Imagine
you want to build a skyscraper in New York City.
You need to buy up a whole city block consisting
of maybe 20 different lots. OK, a huge, complex
assembly of land. Right. Now, if even one of
those lots has a Torrens title, meaning it's
dependent on a government bureaucracy to certify
it and there is a dispute or a delay, the whole
project stalls. Because bureaucracies are slow.
You're waiting in line at the DMV 20 times. Exactly.
And if there is a dispute on plot number 12.
The bureaucrat freezes everything. A government
official has to follow the rules strictly. They
can't take risks. They can't make a judgment
call. They can't. But a private insurance company,
they are capitalists. They can look at plot number
12, see a minor error and say, you know what?
We'll take the risk. Here's your policy. Build
the tower. Llewellyn argued that a Torrance title
on one lot could render a whole block unavailable
for skyscrapers because lenders wouldn't finance
it without the speed and flexibility of private
insurance guarantees. So capitalism won. The
banks wanted speed and certainty that they could
control, not a government queue. That, and let's
not underestimate the industry opposition. By
the time Torrens was being tried, the title insurance
industry was already established. They lobbied
hard against registration systems. I was going
to ask about that. They wouldn't just sit by
and watch their business model disappear. Of
course not. They argued that registration systems
were vulnerable to fraud, which is true. Fraud
happens everywhere. And that the complex countermeasures
required to stop fraud in a government system
were too expensive for the taxpayer. Cartel language.
Is that fair? Some critics have used that word.
A 2007 book titled The American Title Insurance
Industry, How a Cartel Fleeces the American Consumer's
Subtle Title, right? Very subtle. Argued that
the industry successfully killed off the superior
Torrance system to protect their business model.
But the industry has a defense. And what's that?
They argued that a system of recordation combined
with private insurance is actually more robust
because it decentralizes the records. How so?
What does that mean in practice? Well, look at
the San Francisco earthquake of 1906. The fires
destroyed the public records hall. All the government
records of who owned what were ash. A complete
wipe out of the official record. Right. But the
title companies had their own private records,
their title plants stored elsewhere. They were
able to reconstruct the ownership map of the
city. If it had been purely a government monopoly,
that data might have been lost forever. That
is a pretty strong point for redundancy. OK,
so we are stuck with the recording system, the
bulletin board model. We have to do the homework
ourselves or rather we pay these companies to
do it. Correct. Let's move to segment three and
talk about how this actually works, because earlier
you said title insurance is retrospective rather
than perspective. Right. This is the key to understanding
why the premiums work the way they do. Most insurance
think car. Health, life is risk assumption. The
insurance company assumes the risk that a future
event might happen. They're making a bet. They
use actuarial science to guess the probability
of you crashing your car or getting sick. They
are betting on the odds. But title insurance
isn't a bet on the future. No, it's risk elimination.
They aren't betting on the odds of a hidden error
showing up. They're spending the money up front
to make sure there are no hidden errors. So they
are detectives, not gamblers. That's a great
analogy. The premium you pay isn't really for
the payout pool. It's for the investigation.
In the industry, they call this the search and
exam. The search and exam. They go to their title
plant. which is a cool term for their massive
database of geographical indexes. And they trace
the chain of title back 40, 50, 60 years. What
does a title plant look like? I'm imagining a
greenhouse, but with file cabinets instead of
flowers. Think less greenhouse, more Indiana
Jones Library. Historically, these were massive
rooms filled with tract books. While the public
records are filed by name, a grant -a -grantee
index title plans organized records by geography.
So they have a specific page for Lot 4, Block
B. Precisely. It makes searching the history
of a specific dirt patch much faster than searching
by names, which can be misspelled or common.
Nowadays, it's mostly digitized, but these databases
are proprietary and massive. They're the company's
crown jewels. And do they actually find stuff
or is this just paper pushing to justify a fee?
They absolutely find stuff. There is a statistic
often cited by the American Land Title Association
or ALTA. They claim that more than one third
of all title searches reveal a problem that must
be fixed before closing. One in three. That's
incredibly high. If one in three cars on the
assembly line had a defect, the factory would
be shut down. It is high. Now, many of these
are minor. Unpaid local taxes are common or a
mortgage that was paid off, but the release was
never properly recorded. But sometimes it's weirder.
Like what? A mechanic's lien is a classic example.
Let's say the previous owner fixed the roof in
1995, but got into a fight with the contractor
and shorted him $500. The contractor filed a
lien. That lien sits there accruing interest
for decades. So if I buy a house and the previous
guy didn't pay the roofer in 1995 and I don't
have title insurance or a proper search. The
roofie can come after me. They can put a lien
on your house, yes. Because the debt attaches
to the land, not just the person. And if you
don't pay it... they can force a sale of your
home to satisfy their 20 -year -old debt. That
is terrifying. It's like buying a used car and
finding out you owe the mechanic for an oil change
done 10 years ago. Exactly. And this is what
the title search is designed to find and fix.
This creates a very unique financial structure
for the insurance companies. How so? In most
insurance, like car insurance, maybe 80 % of
the premiums go to paying claims and 20 % covers
operations and profit. Right. In title insurance,
it's flip. Because if they do their job right,
there shouldn't be any claims. Exactly. A claim
in title insurance means the search failed. It's
an error. The goal is zero claims. Another thing
that makes it unique is the payment structure.
I feel like I am constantly paying premiums for
my car and my health. But title insurance was
just... One check. One and done at closing. Yes,
a single premium at closing, no annual fees,
and the coverage lasts as long as you or your
heirs retain an interest in the property. Wait,
or your heirs. So if I pass the house down to
my kids, the policy I bought in 2024 still covers
them? Typically, yes. The language of the policy
usually extends coverage to heirs as long as
they acquire the title from you. It's a very
long -term product for a one -time fee. Okay,
that makes the sticker shock a little easier
to swallow. There's a lifetime guarantee. But
let's talk about what we are actually buying.
Because I remember looking at my closing documents,
which was a stack of paper three inches thick,
and seeing lender's policy and owner's policy.
The two policies. I just signed both because
I wanted the keys. Why are there two? Why isn't
it just one policy for the house? This is the
most common confusion for homebuyers, and it's
dangerous if you get it wrong. The lender's policy
is mandatory. If you are getting a mortgage,
the bank will force you to buy this. And I pay
for it, even though it protects the bank? Yes.
You pay the premium. It covers the bank's interest,
which is the loan amount. So if you have a $400
,000 mortgage... the policy insures the $400
,000. Okay. If the title turns out to be bad
and the house is lost, this policy pays off the
bank, but it does not protect your equity. So
if I put $100 ,000 down and the house is taken
away because of a title fraud, the bank gets
their $400 ,000 back and I get nothing. I lose
my down payment. If you only have a lender's
policy, yes. You lose your down payment and any
principal you've paid. Your investment is wiped
out. Oh, my God. That is why the owner's policy
is critical. It is technically optional in many
places, but you would be crazy not to get it.
It sounds like it. The owner's policy covers
the purchase price. It assures you that the title
is vested in you. And crucially, it covers legal
defense costs. That's the big one. If someone
sues claiming they own my porch because of some
100 -year -old survey error, I don't have to
hire a lawyer. The title company has a duty to
defend you. And property litigation is incredibly
expensive. Even if you win, the legal fees could
bankrupt you. The policy covers that. OK, so
get the owner's policy. Yeah. Got it. Now let's
talk about shopping, because when I bought my
house, my real estate agent just said, use this
title company. And I said, OK. Yeah. I assumed
it was like the gas company. You just use whoever
services the area. Did I mess up? You didn't
necessarily mess up, but you might have overpaid.
This brings us to a very important federal law
called RESPEA, the Real Estate Settlement Procedures
Act. RESPEA. Sounds friendly. It is friendly
to consumers. It explicitly gives you the right
to choose your title insurer. Federal law says
that banks, brokers, or attorneys cannot mandate
a specific company. But they can recommend one,
right? And I imagine their recommendations carry
a lot of weight. They can recommend, and they
often do. but they cannot require it. And there
is a specific section of REITCA that is fascinating.
It says that sellers cannot require a buyer to
use a specific title company as a condition of
sale. So a seller can't say, I'll only sell you
this house if you use my brother's title company.
And if they do and you catch them, the penalty
is severe. The buyer can sue the seller for three
times the title insurance charges. Triple damages.
I like that. So the government really wants to
protect our choice here. They do. And this extends
to the transparency of the costs. Have you heard
of the loan estimate or LE? Yes. That's the standard
form you get when you apply for a mortgage. It
breaks down all the costs. Right. It used to
be called the good faith estimate, but the new
loan estimate from the CFPB, the Consumer Financial
Protection Bureau, is much stricter. It puts
lenders in tolerance buckets. Tolerance buckets.
Explain. That sounds like jargon. It is, but
it's important. So when a lender quotes you a
fee on that form, they are held to it. There
are three categories. First is 0 % tolerance.
Zero tolerance. Sounds serious. It is. These
are fees for things you cannot shop for, like
the appraisal or credit report fee from the lender.
If the lender says the appraisal will cost $500
and it ends up costing $600, the lender has to
eat that $100 difference. You pay 0 % more. Okay,
I like that. What about title insurance? Where
does that fall? Title insurance usually falls
into the 10 % tolerance bucket if you use the
provider on the lender's written list of service
providers. So if I go with their recommendation,
the price can't go up by more than 10 % from
the initial quote. Exactly. If the aggregate
of all those 10 % bucket fees goes up by 15%,
the lender has to pay the 5 % overage. This stops
bait -and -switch tactics where they quote you
a low closing cost to get you hooked and then
jack it up at the signing table. That is a huge
consumer protection. Yeah. But who actually sets
the prices? Can I haggle, is it like a car dealership?
It depends wildly on where you live. This is
a state -by -state regulation map. The rules
are all over the place. Give me some examples.
What are the extremes? Okay, the biggest extreme
is probably Texas. The state sets the exact rate.
It's called promulgation. You can shop for better
service, but the price for the policy will be
identical at every single company. It is set
by law after a hearing each year. So in Texas...
haggling is useless. You're just shopping for
who answers the phone faster. Correct. But then
you have states like Illinois or Georgia, where
there is no direct rate regulation. Insurers
set their own rates. So there, shopping around
could save you hundreds or even thousands of
dollars. And what about Pennsylvania? the birthplace
of the industry. They have a hybrid system with
discounts. They have something called a reissue
rate. If the property was insured in the last
10 years or if you are refinancing, you get a
discount often around 10 % to 30%. Wait, hang
on. I need to check my closing statement. I refinanced
a few years ago. I did not know about this. I
hope I got that reissue rate. Many people miss
it. You have to ask for it or make sure the title
officer knows there was a prior policy. It's
free money if you qualify. That makes me so angry
at my past self. OK, this is great practical
advice, but let's pivot to the juicy stuff. Segment
five, industry dynamics and controversies. You
mentioned referrals earlier. My agent recommended
a title company. Is there something happening
behind the scenes there? This is the elephant
in the room. It's called an affiliated business
arrangement or ABA. This is when a lender, a
realtor or a developer actually owns or has a
financial stake in the title company they are
referring you to. So my realtor says, use ABC
Title. And it turns out my realtor owns ABC Title.
Or their brokerage firm does, yes. This is essentially
a one -stop shop concept. The industry argues
it's for your convenience. Hey, we can handle
the loan, the finding of the house, and the title
work all under one roof. Seamless. Convenience
is nice. But it sounds like a massive conflict
of interest. If I'm hiring a title company to
find problems, do I really want them owned by
the person who only gets paid as the deal closes?
That is the exact question. Consumers seem to
think it's a conflict, too, when they know about
it. The Ohio Association of Independent Title
Agents, or OAIATI, did a survey in 2009 -2010.
They found that 58 % of respondents felt these
arrangements were a conflict of interest. That's
majority. And it gets more interesting. When
people realized the referral came with a profit
share, 50 % said they would prefer an independent
third party. Because if the realtor owns the
title company, is the title company really going
to dig deep to find a problem that might kill
the realtor's commission? That is the fear. The
fear is that the checks and balances are eroded.
Of course, the industry has its own data. The
Real Estate Services Providers Council cites
studies from 2002 and 2008 claiming higher customer
satisfaction with one -stop shopping. We investigated
ourselves and found that customers love us. I'm
skeptical. To be fair, convenience is a value.
But legally, if an ABA exists, they must disclose
it to you. You get a piece of paper saying we
have a relationship with this company and you
are free to shop elsewhere. The problem is that
paper is usually buried in a 100 -page stack
you sign in a hurry at closing. Right. Sign here,
sign here, sign here. I probably signed three
of those and didn't read them. Let's talk about
the money. How profitable is this industry? You
said claims are rare? They are very rare. Let's
look at the 2012 data from ALLTA. the industry
took in 11 .2 billion dollars in premiums they
paid out 908 million dollars in claims okay i'm
looking at these loss ratios in the source material
and the math is blowing my mind you're telling
me that for every 100 in premiums they collect
They only pay out about $8 in claims. Roughly,
yes. In 2012, it was about 8 .1%. They call this
the loss ratio. That is obscene. I mean, look
at car insurance. If Daico collects $100, they
are paying out $70 or $80 to fix crashed cars.
Or boiler insurance, another inspection -heavy
type, pays out 25%. Title insurance is giving
92 % of the revenue. How is that not just a massive
scam? If you ask the consumer advocates, it is
a scam. They argue it's a reverse lottery where
the house always wins. But, and I have to play
devil's advocate here, the industry has a very
specific defense for this. Okay, let's hear it.
They say you are misunderstanding what you're
paying for. I'm paying for insurance. It's in
the name. They would say no. They say you are
paying for prevention. Think of it like a security
guard versus a theft policy. Do what? A theft
policy pays you after you get robbed. A security
guard stops you from getting robbed in the first
place. Title insurers argue that the 90 plus
percent of the premium they keep isn't profit.
It's the salary of the security guard. I see.
They spend that money maintaining the title plants,
paying the researchers and fixing the one in
three errors before the closing happens. So their
argument is the reason our claims are so low
is because we are so expensive. Precisely. If
they stop spending that money on research. the
claims would skyrocket. It's a risk elimination
model, not a risk assumption model. The low payout
is a feature, not a bug. It proves the system
is working. I get the logic. I really do. But
then I look at the profit margins of the big
four insurers, and I wonder if that security
guard is really costing them that much, or if
we're just paying for a monopoly. Because looking
at the market share here, there isn't exactly
a lot of competition driving prices down, is
there? Not really. It's highly concentrated.
There are the big four families of insurers,
Fidelity National Financial, First American Corporation,
Old Republic, and Stewart Title. How much of
the market do they control? In 2012, Fidelity
had about 34%, First American 26%, Old Republic
13 .5%, and Stewart about 13%. So wait, let me
do the math. That's... Over 86 % of the entire
market is controlled by just four companies.
Yes. Collectively, these four giants control
the overwhelming majority of the market. Regional
companies only make up about 13%. So it's an
oligopoly. Four giant companies dominating the
landscape. Yes, which makes the shopping around
advice interesting. You are often shopping between
agents who are essentially reselling policies
from one of these four big underwriters, not
always getting true market diversity. And since
their revenue is tied to the housing market,
they must have taken a beating in 2008. They
did. Revenue fell off a cliff in 2007. It's a
highly cyclical industry. They have to bank cash
during the boom years, like the 2000 -2006 bubble
where revenue doubled, to survive the busts when
no one is buying or selling houses. Okay, this
has been a whirlwind tour of a piece of paper
I definitely took for granted. So let's bring
it in for a landing. What is the big picture
here? Let's summarize. The summary is this. Title
insurance is the invisible shield that allows
the American real estate market to function.
Because we rejected the torn system where the
government guarantees ownership and stuck with
the bulletin board recording system, we created
a massive gap in security. A gap of trust. We
don't know for sure if we own what we buy. Exactly.
And private industries stepped in to fill that
gap. They monetize the risk of the past. They
check the records. They fix the errors. And they
insure against the unknown problems that they
might have missed. And for the listener, the
so what seems pretty clear. First off, check
your loan estimate. Absolutely. Do not just blindly
accept the provider your lender or realtor suggests,
especially if you see an affiliated business
arrangement disclosure. You have the right to
shop. Unless you're in Texas. Unless you're in
Texas. But even then, you can shop on service.
But in most places, call a few independent title
agencies, ask about their rates. And if you are
refinancing or bought the house recently, ask
about the reissue rate. And make sure you get
the owner's policy, not just the lender's policy.
Don't leave your equity naked. Critical advice.
That's probably the single most important takeaway.
So here is the final provocative thought I want
to leave everyone with. We pay billions of dollars
every year, $11 billion back in 2012, surely
more now, to private companies to maintain records
and ensure titles because we don't trust our
own government to guarantee property ownership.
We are paying a tax to private corporations for
efficiency and risk management. So the question
is, is the speed and flexibility of this recording
system actually worth that extra cost to every
single homebuyer? Or was the rejection of the
torrent system a century -old mistake that we
are literally still paying for every time we
close on a house? It raises a profound question
about the role of government versus private enterprise
in the most fundamental asset we have, our land.
Something to think about next time you see a
for sale sign. Thanks for diving deep with us.
We'll see you next time.