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Source of Title Blog

What The E&O Insurers Do Not Understand
by Robert Franco | 2009/03/15 |

The dynamics of the title industry have changed dramatically over the past decade or so, but errors and omissions insurance has not.  This has caused many abstractors' insurance premiums to rise, often due to claims which are beyond their control.  When you consider the types of claims that are classified as "searching error," it is easy to see how independent abstractors could do everything right and still see an increase in their annual premiums for E&O insurance. 

Source of Title Blog ::

There are three main professional liability coverages that title insurance agents maintain: title agency, abstract/searcher, and escrow/closer coverage.  Depending on the services provided, vendor management companies ("VMCs") have similar coverage, and abstractors mainly only carry the abstract/searcher coverage.  The classification of claims can impact these rates, regardless of which type of insured files the claim.  For example, if a title agent files a claim that is classified as a "searching error," the rates for all three types of insureds (title agents, VMCs, and abstractors) may go up.  This means that professional independent abstractors may pay higher rates for their E&O insurance even if the abstractor is not liable to their client for the "searching error" that caused the claim.  Here, I will present a couple of specific hypothetical examples of how this may occur.

1.  Uninsured Abstractors

As we have previously discussed, ad nauseam, on this site in the past, there are a plethora of inexperienced abstractors providing title searches in this industry.  This is mainly due to the title agent and VMC clients that typically favor the cheapest searches they can obtain.  Experience is rarely an important factor in determining which abstractor will receive the work from many clients.  Many of these inexperienced abstractors do not carry E&O insurance, but they certainly play a role in the higher premiums that independent abstractors pay for their coverage.

For example:  XYZ VMC orders a search from a cheap, inexperienced, and uninsured abstractor who misses a judgment lien.  A policy is issued and a claim results.  When the claim is submitted to XYZ's insurance carrier, it will be classified as a "searching error."  It doesn't matter that the abstractor did not have E&O insurance, the claim is still figured into the "searching error" classification and when the E&O carriers evaluate the claims history to determine rates for "abstract/searching" coverage, the rates will go up.

2.  Short Searches

All of the major underwriters have lowered their searching standards for issuing title policies - most now accept current owner searches for some types of polices.  At one time, full searches were done when any policy was issued.  Common sense would indicate that if a short search is conducted there is a higher risk of a previous defect going undetected.  If it is later discovered (maybe when the property is foreclosed on) it, too, will be classified as a "searching error" even though the abstractor was not asked to do a more thorough search.

For example:  ABC Title Agency orders a current owner search from an independent abstractor.  The search is conducted per the agent's request and a policy is issued.  When the property is foreclosed on and a more thorough search is done by the law firm for the lender, it is discovered that the previous owner had a judgment lien that was never paid off. 

ABC has no claim against its abstractor because the abstractor was not negligent - he provided the current owner that was requested and the judgment lien was filed prior to the time-frame ABC asked him to search. Nevertheless, ABC files a claim on its E&O policy and the insurer classifies this as a "searching error."  Once again, this claim will be taken into account when the insurer sets their premiums for "abstract/searcher" coverage.  Independent abstractors will pay higher rates because of this type of claim that was not the fault of the abstractor.

I believe that these types of claims are much more common that the industry wants us to believe. These claims should not be attributed to independent abstractors.  They are a result of a greedy industry that is willing to assume greater risks to save a buck or two.  Unfortunately, the professional independent abstractors are paying for it through higher E&O premiums. 

I often hear abstractors complain about higher rates, despite never having filed a claim on their policies.  I think I have just demonstrated why that is; it doesn't matter who files the claim, if it is attributed to "searching error" it will affect the premiums paid for "abstract/searcher" coverage.

What needs to be done to correct these fictional "searching error" classifications?  I say "fictional" because these claims should never be attributed to professional independent abstractors - they are a direct result of inexperienced, uninsured abstractors, and clients that are not requesting appropriate full searches as they once did. 

First, the E&O Carriers should classify claims separately based on which group causes the claim, not the general "searching error" classification we have now.  This recognizes that even professional independent abstractors make mistakes and can cause a "searching error" claim, and for those mistakes they should be held accountable through higher premiums.  However, the professional independent abstractors who maintain E&O insurance should not be paying higher rates for the mistakes caused by their clients who take advantage of inexperienced, uninsured abstractors, or those who order short searches.

Second, meaningful licensing should be considered in every state and professional abstractors should be required to carry E&O insurance.  All searches should be required to be performed by licensed abstractors.  This would help reduce the number of "fly-by-night" abstractors, who provide cheap services without E&O insurance, that impact the premiums for the rest of us.  These abstractors do not share in the burden of paying the premiums, but they contribute the dramatic increase in them. 

Third, every state should mandate full searches for all insured products.  It was hypothesized in an amicus brief filed by the National Association of Independent Land Title Agents that short searches were the result of cost cutting measures necessitated by the increase in costs associated with controlled business arrangements.

Often it is the variance in the title insurance underwriter's title search standards that marks the difference in the quality of the risk avoidance being performed.  Unfortunately, in recent years the standards for a land title search or title examination demanded by the some title insurance underwriters, prior to the issuance of title insurance, has been lessened due to the rising costs of securing title insurance market share and the necessity to compensate the referrer of the title insurance business...

In a cost saving measure some national title insurance underwriters require only a "current owner" search of title in residential transactions, meaning that the title abstractor/examiner is required by the title insurance underwriter to search only the current owner's title back to the moment that owner took title, thereby omitting liens and other encumbrances that would have attached to the interest held by prior owners in title.  This is in contrast to other title insurance underwriters' requirements for the customary "full title search" of forty plus years being from the deed or "root" of the current owner's title.  Only through a "full title search" and a detailed listing of encumbrances, easements and restrictions in a policy can an owner know the status of his title prior to the issuance of the title insurance policy.

(Edwards v. First American, Case Nos. 08-56536, 08-56538, Brief of National Association of Independent Land Title Agents as Amicus Curiae in Support of Plaintiff-Appellant, pp. 13-14)

Not only does this affect the consumer, but, more pertinent to the discussion here, this "cost saving measure" increases the cost of doing business for abstractors who are constantly being pressured to lower their fees.  Those making the decisions to order short searches are benefiting from the reduced costs of the searches, yet those who conduct the searches are paying the price through higher premiums.

It may seem profoundly unfair to the independent abstractors who are seeing their premiums rise, but many incorrectly direct their anger toward their insurance carrier.  In fact, it may just be their clients (and others like them) who are causing the increase cost of E&O insurance.  Perhaps the carriers need to understand the new dynamics of the title industry and price their premiums accordingly, but the industry is first and foremost to blame. 

Robert A. Franco
SOURCE OF TITLE




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Categories: E&O Insurance, Title Industry, Title Standards

2058 words | 5262 views | 11 comments | log in or register to post a comment


Cost saving?

You are correct in describing how the "cost saving measures" such as short searches and inexperienced abstractors are really "cost shifting measures", moving the expense from the underwriter to the abstractor and E&O companies.

 
by Dave Pelligrinelli | 2009/03/16 | log in or register to post a reply

That does appear to be what happens...

It would be nice to get some information from the E&O insurers explaining how they handle those claims.  I would think that if the insured made a decision to do a short search, any claim resulting from that decision would be denied.  After all, it wasn't the search that caused the claim, it was the determination that it was unnecessary to do a thorough search.

But, I wonder if they really understand what is happening.  The claim may just be submitted as "our search failed to discover this..."  rather than "... we decided not to search for this."  To protect our premiums from being impacted from this type of claim, it would be nice to see the E&O carriers make the distinction.  I'm not convinced they are.

 
by Robert Franco | 2009/03/16 | log in or register to post a reply

Maybe it's just me, but I'm not quite getting this.

Robert, I agree with all of your conclusions.  But that's mostly because you are preaching to the choire.  Here are a couple of your arguments that I just don't get:

Why would an agent file a claim with his E&O carrier if a lien suffered by a previous owner triggered a claim on the policy, if the underwriter only required a current owner search to underwrite the policy?  Would not the underwriter then be responsible for settling the claim?  It seems to me that the agent has satisfied the requirements set by the underwriter.

and

In the case of the amicus brief by the National Association of Independent Land Title Agents:  It seems to me, at least the way the controlled business arrangements work around here, that the title search is one of the few avenues of income available to the underwriter where AfBAs are concerned.  The title search, closing fees and a small cut of the premium are all the underwriter gets.  The bulk of the premium and all of the endorsement fees and anything else the affiliated business cares to pile on goes to the 'agent'.  So, why then wouldn't the underwriter want to sell the more expensive full search, and provide itself greater protection from claims at the same time?

 
by Patrick Scott | 2009/03/17 | log in or register to post a reply

Certification instead of licensing

Robert I agree with your proposed solutions, but on the second point,  I don't know if licensing may necessarily be the best approach.  If the license is nothing more than an application and a fee then that it is not really preventing bad searchers from entering the market, it is just preventing bad searchers who don't have enough money from entering the market.  It may even keep some good searchers out in smaller markets where there is not enough business to justify the costs.  Licensing has the additiional problem of being reliant on the state legislature being willng to pass the legislation and administer any required testing and doing a good job of each.  In Pennsylvania, to take an example, the odds of our state legislature requiring licensing for searchers are basically non-existent and although the state does license agents, the test is based on a knowledge of the insurance statutes, not really practical questions about the industry.   I wouldn't call it a joke necessarily, but it is not as difficult as it should be and I've never heard of anyone failing the test - a sure sign it is too easy.

My understanding now is that whereas most claims in our industry use to come at the settlement table, most are now coming from bad searches and examinations.  Rather than wait on the legislature to pass something that doesn't really tackle the problem directly, now may be the time for the underwriters and land title associations to get involved.  Instead of licensing, have each state land title association develop a title search/examiner test that is state specific and comprehensive.  Have an outside company administer the test if necessary.  Then have all of the underwriters announce to their agents that the agents are only allowed to use searchers who have received the state's land title association certification for title searching.

I'm sure I'm not the first person to suggest this, and the NALTEA test was no doubt designed with something like this in mind, but since the underwriters are now taking such big hits from bad searches, I think they may finally have a vested interest in improving the professional standards for searching.  They are also the only ones with any real means to get the process rolling as well as to enforce it.  This shouldn't be too difficult to set up or administer and the cost would certainly be relatively small and justified when looking at the millions in losses the underwriters are currently experiencing.  This may even help check the "race to the bottom" that the searchers in this area describe with smaller fees, months of unpaid invoices, and cutting corners to get the work out in less than 24 hours.

 
by David Jenkins | 2009/03/17 | log in or register to post a reply

The Document Preparer

I think our E & O premiums are increasing due in large part to the document preparer.With the computerization of many of the once paper/book form index we have to 'guess' at how 1)The clerk indexed it 2) How the document preparer created it 3) how the borrower signs all different than how the person took title.  There isn't uniformity with in a county let alone statewide.  So asking the underwriters and land title associations to tackle is at the state level is nearly impossible in Virginia, espcially since our recent legistation regarding coversheets and proper indexing by the preparer not the clerk.

We have had a lot of experience where if were weren't running a name as wildly as possible we would miss reporting something and still there are things that are coming up.  Namely IRS liens with whole new names and variations of names that we just couldn't account for.  In our area, we are a mixed poplulation of various ethnic groups.  We often have a problem of distinguishing first and last names (not even talking about the middle name that is really another surname variation). 

If the person takes title as Smith, John, and the client provided the name of Smith, John B.  How is it that I am to find and IRS lien or Deed of Trust in the name of Blake, John S.  This happened to us.  The next searcher was provided the name of Blake, John and they found the DOT in question and IRS lien.  Smith, John aka Blake, John not the real name but the example is valid.  So we wait to determine if this will be claim against us for something really out of our control.

Creating a standard for searchers and licensing them would be great but what about the standards for the document preparers that they are not giving due notice when they are creating documents other than how a person is taking title or the clerk not indexing something correctly.

I believe that claims are paid based upon a loss ratio vs. defense.  If a claim is for $4000, your E & O deductible is $5000, it is foolish to turn it to your E & O for payment, so you might just pay it b/c to defend it would cost more than the claim.  Next case the claim is for $13,000, deductible for $5000, you pay the deductible but your E & O carrier decides that it would cost $15000 to defend it so they pay the $13,000 b/c it is cheaper to pay it off than to defend it.  I am knocking on wood that we have not had these instances ourselves but our friends and associates have had similar situations.  These are all relatively small but they do add up.

Next when we are reporting these prior to current owner defects in title,  our underwriter is telling us that various policy issurers are refusing to honor their policies for some of the document preparer mistakes.  However the document preparer isn't issuing a release or discharge when they were the one at fault, mostly b/c they didn't order a title search in the first place let alone and insured product.    Thank goodness the Stream Line loan has disappeared, hopefully forever. 

Just some thoughts as I step down off of my soap box.

 
by Marian Littleton | 2009/03/17 | log in or register to post a reply

E&O-and claims made

When dealing with a claim, be sure to take into consideration on any case the "fee charged" by whoever is doing the settlement or closing - your liability is only for that portion of the total fee that you were paid-the other party(VMC-other named title company) would pick up the difference. For instance, if the HUD-1 shows a fee of $200.00 for the title(lines 1100-110* now) and you were paid $100 to do the title- the split would be 50-50 on the claim-( work this anyway  you have to).
It is a little know fact that the liability is "shared" when someone else jacks up the fee!!! I know this from experience, unfortunately.
Steve Meinecke

(Please use "spell check " before submitting posts-it makes those of us that can't spell, look like we can- and if you don't use spell check and can't spell- it makes you get ignored all the quicker)

 
by STEVE MEINECKE | 2009/03/17 | log in or register to post a reply

Thank you for the replies...

I have been out of the office for the past day and half - I have lots to catch up on.

Regarding Pat's comments:

Why would an agent file a claim with his E&O carrier if a lien suffered by a previous owner triggered a claim on the policy, if the underwriter only required a current owner search to underwrite the policy?  Would not the underwriter then be responsible for settling the claim?  It seems to me that the agent has satisfied the requirements set by the underwriter.

This is true and I do agree... this should not really be an E&O claim.  But I think it could turn into one.  I have seen many underwriters' standards and they are quite vague.  One I recall said "Do a current owner search AND show all liens, easements and other encumbrances."  If the agent orders a current owner from an independent abstractor and there was a prior encumbrance that was not show (nor even searched for), this could likely be classified as a searching error and the underwriter could go back on the agent, per the agency agreement.  In this case, the abstractor did what was asked and would not have a claim - the agent may have to file a claim on their policy, however.  Would this be covered by their policy?  I'm not sure, but I think it happens.  It would be nice to get this information from the E&O carriers... if they even make the distinction.

So, why then wouldn't the underwriter want to sell the more expensive full search, and provide itself greater protection from claims at the same time?

Around here, the agents charge the same "exam fee" regardless of the type of search they do.  They order current owners because they are cheaper and they get to keep more of the exam fee for themselves.  They have a profit incentive to do a short search.

Regarding David's comments:

I prefer licensing to certification becasue certification is voluntary and the industry really has no incentive to self-regulate in this area.  You argue that the high claims environment should be enough to prompt them to take action, however the underwriters have had ample opportunity to do this and have not.  They are much more interested in keeping the searching costs at a minimum regardless of what is in the best interest of the consumer.  They have apparently already made the decision that the savings justifies the increase in claims.

You are quite right about the licensing in most states... its merely an application and a fee.  That is why I said it must be "meaningful" licensing.  The legislature needs to pass laws that ensure that those it licenses are skilled and well trained, we need to ensure that we have qaulified abstractors and they are the only ones permitted to conduct title searches in the state.  They also need to require more thorough searches when title insurance policies are issued.  Kansas has a good licensing scheme and Arkansas has good search standards laws.  We should take a closer look at combining those as a model.

Regarding Steve's comments:

your liability is only for that portion of the total fee that you were paid-the other party(VMC-other named title company) would pick up the difference.

You have made this claim before, but I have been unable to find any legal basis for it.  If you can provide a citation to the law that requires this treatment of claims, I'd be interested in looking at it.  It would be great if it were true, all of my clients mark up my search fee as an "exam fee" but I don't think that limits my liability.  I agreed to do the search for the price I charged - if the client incurs a loss because of my negligence, I do not think that there would be any such limitation on my liability.

 

 
by Robert Franco | 2009/03/18 | log in or register to post a reply

Info for re E&O liability

Robert- I sent you ,by e-mail, the article that discusses this point. The third page starts it off as far as doing "core title work" and what that means as well as the section 8 violations for charging an additional fee and not doing any core title work to add to the value of the title search.

According to what you state, the companies you are providing title searches to are all violating this provision then and by doing so, they take on the liability of that portion of the total fee. 
Steve Meinecke

 
by STEVE MEINECKE | 2009/03/19 | log in or register to post a reply

Thank you, Steve.

I appreciate you taking the time to send the RESPA regs.  I have read them before and I agree that when a service provider marks up a fee without providing any additional value they may be in violation of RESPA.  However, I think that your conclusion that the violation reduces the liability of the abstractor in proportion to the markup is misplaced.  RESPA is a consumer protection statute that is irrelevant in what is essentially a contract dispute (or the tort of negligent misrepresentation in some states) between the title agent and the abstractor.  If there is a RESPA violation the agent may be liable to the consumer, but it will not change the abstractor's liability to the agent for his negligence.

I think the example you highlighted in the regs will further illustrate my point.

In another example, Illustration 10 of Appendix B, a real estate broker refers title insurance business to its own affiliate title company.  This company, in turn, refers or contracts out all of its business to another title company that performs all the title work and splits its fees with the affiliate.  HUD stated that because the affiliate title company provided no substantive services for its portion of the fee, the arrangement between the two title companies would be in violation of section 8 of RESPA.  This illustration showed that the controlled business arrangement exemption did not extend to the 'shell' entities that did not perform substantive services for the fees it collected from the transaction.

When the example refers to "all the title work," they are not referring to the title search.  I do not believe that HUD considers the search (or abstract) to be a core service.  Rather, they are referring to the "examination" of the title search, the preparation of the title commitment, and the underwriting decisions that are required to issue a policy.  Those are the "substantive services" mentioned in the example.

I would agree with you that if the agent passes your fee along to the consumer as a separate line item on the settlement statement, distinct from the examination fee, and there is a substantial markup, it could result in a violation of RESPA.  However, two points are worth mentioning.  First, there are administrative fees involved in contracting out the search and recovering a reasonable amount to cover these costs would probably not be a violation.  Second, as is common around here, the search fee is not separated on the settlement statement - it is rather incorporated into the examination fee.  There is most likely value added in the examination of the search to determine insurability and this examination is a core service. 

Nowhere in RESPA is there an express pro-ration on the liability that may arise as a result of a claim against the abstractor for negligence.  Nor are there any court cases which have ever made such a determination - at least none that I have been able to find, and I have looked.  As I mentioned, RESPA is a consumer protection statute that would have no bearing on the dispute between the abstractor and the agent.  That being said, it is not uncommon for a title agent to agree to share the liability of a claim with a negligent abstractor.  That, however, arises as a result of a settlement that may just be good business practice, not out of any legal provision for the apportionment of liability as a result of a markup.

I am certainly no expert on RESPA, but I have researched the abstractor liability issue fairly thoroughly.  If anyone has anything to add or clarify in my interpretation of RESPA, it would be a welcome comment.

 
by Robert Franco | 2009/03/19 | log in or register to post a reply

A reply to the RESPA question

Thanks for your reply and I accept what you have said. I do not pretend to be a source of legal facts , just what I feel is an interpretation of them. I give in to your detailed information.
As I stated in my e-mail to you, I have only been involved with one claim in all my years, and I presented my interpretation of the liability issue to the underwriter of that case, which was
St. Paul /Travelers at the time. The agent that handled the case agreed with me and went forward with that same interpretation. Now, maybe we were both wrong in that aspect, but the other side agreed to a split in liability( the other side was represented by a big law firm from Chicago too) It may have been due to the fact that the title fee was in fact pumped up on the HUD-1 and different from the check that was paid to me for the title search, or a combination of things, I don't know- but out of $108, 000, we were liable for only $40,000-and I also do not know what the actual amount that was paid to the title company really was- but the check to the property owner was the $108,000- as with any "deal" the real facts can be blurred.
Maybe the "liability" issue can in fact be asserted in future cases, just as a way to highlight the overcharging for title fees by those that actually increase the title fee and do not add any "value" to the title or add any "core title work". I do not feel that adding a cover sheet with a new fee and a different tile company name to the title constitutes any value or core title work of any kind. Do you feel that this kind of action warrants a "fee increase"  that the consumer should have to bear or be mislead into paying?
Steve Meinecke

 
by STEVE MEINECKE | 2009/03/19 | log in or register to post a reply

If your lawyer and insurance company say so...

Your lawyer and insurance company could be right that if your client marks up your fee, they assume a proportionate amount of the liability.  There could be a legal basis for such treatment, but I do not believe that it can be founded on RESPA.  There may be an equitable principal that requires it, but I am unaware of it.  If there is, it would most likely come from state law that deals with contract or tort disputes and that would vary by state.  It sounds rather odd to me, though.

A few years ago, I was told that there was a case in Washington state that applied a similar rule.  I searched for the case and was unable to find it.  At one point I was given the name of an attorney that supposedly knew of this case.  I called and asked her about it and she said "You have been going to law school for a few years now, does that sound like anything a court would do?"  It doesn't.  She had never heard of such a thing and didn't believe that it was true... I just chalked it up to "urban legend" or "Internet myth."

I do not feel that adding a cover sheet with a new fee and a different tile company name to the title constitutes any value or core title work of any kind. Do you feel that this kind of action warrants a "fee increase"  that the consumer should have to bear or be mislead into paying?

I do feel that the markup that is sometimes applied to our searches is excessive and I do not think it is right to charge the consumers hundreds of dollars for something that only costs $45.  However, that is a dispute between the consumer and their title company - it doesn't really involve the abstractor.

It basically comes down to this... the abstractor agreed to do a search for the title company for a specific price and that price was paid.  The abstractor has incurred the duty to perform the services with due diligence.  If the abstractor is negligent, he is liable for the losses he causes to his client.  The price the client charged for the service doesn't seem to be relevant to the analysis.

It would be a nice rule for abstractors if it exists, but I cannot find any legal basis for it.  My guess is that the argument was presented by your insurance company as a basis for working out a settlement and it was accepted by the other side.  It actually is a nice basis to present a settlement offer - it provides a starting point for what you believe is a fair offer and there is a logical reason for it.  However, if the offer were refused, I do not think the argument would be successful in court for limiting your liability. 

Either way, it seems to have worked out well for you.  I think you got a fair and equitable result.

 
by Robert Franco | 2009/03/20 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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