Title insurance vs. alternatives: Considering the claims process

Before getting into the differences between the two options, it’s important to understand that title policies don’t operate like typical homeowner or auto insurance in that they’re covered by an upfront fee at closing, not an annual premium.

Neither does title coverage pay out like a homeowner or auto policy when there’s a claim. Rather, the insurance goes toward contesting any competing “liens, encumbrances or defects” on the property in court so that the policyholder’s ownership gets preserved.

“For most people, title insurance is really litigation insurance,” said Steve Gottheim, general counsel for the American Land Title Association.

Problems that can affect ownership, like a mechanics lien from an unpaid contractor who worked on the house, will most likely be found in the initial title search and cleared up, but if they’re something that turns up later instead, it’ll likely take legal action to get them resolved.

Lenders and investors who buy their mortgages on the secondary market typically require borrowers to pay for a title policy or alternative. ALTA also recommends borrowers get an optional owner’s policy to directly protect their rights.

Title insurers brought in $17.6 billion in premiums during the first nine months of 2022, paying out $438.7 million in claims during that time, according to ALTA.

The industry typically has a relatively low claims-paying rate. There’s debate between insurers and alternative providers over whether that reflects that mistakes that occur after the initial search are rare, or if it’s due to prudent fiscal management by an insurer, or a potential slowness to pay claims due to the preference for litigation in the industry, or a combination thereof.

“Title insurance does a lot of good things. The principal drawback is that, in my experience, …frequently, when you have a claim, you will get into very contentious…litigation…which sort of is a negative…,” Hosack said “I’m not saying title insurance should pay all claims, but I’m just saying I think it would be nice if it paid a few more.”

Title insurance claims were up during the first nine months of last year when compared to the same period a year earlier, when it paid $352.5 million, even though its premiums were down 7%.