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.

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.

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?

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.

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.

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)

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.

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

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.

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

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.