I just got through reading First American's 41 page answer and counter-claim to Bank of America's 43 page, $535 million lawsuit against them (whew!). 

To summarize the filing very briefly, there seems to be little dispute about the number of claims or the nature of the title defects alleged, but First American says that the roughly 2,000 claims that have been denied were denied for good reason, i.e. the claim was due to some circumstance not covered under the policy or there was no loss suffered because of the title defect.  The few thousand additional claims that have neither been denied nor paid are unresolved because, according to First American, B of A has failed to provide the necessary documentation to show the nature of its claim and/or the amount of its loss due to the title defect which caused the claim.  First American states that it believes that Bank of America cannot provide this documentation in many cases because of poor underwriting which failed to adhere to standards required by the insurance contracts-- a circumstance which First American believes should relieve itself of its obligation to pay claims in these cases.

In addition to answering B of A's complaint, First American also filed a counter claim, seeking to cancel insurance policies in cases where B of A allegedly failed to hold up its end of the bargain by adhering to underwriting standards set forth in the insurance contracts.  Any remaining liability, First American seeks to shift onto its agents.

There were several details in the answer which I found very interesting.

First of all, First American admits it knowingly and purposefully underwrote title insurance policies without a title search.  In its answer to Bank of America's lawsuit, First American says the following:

First American admits that Fiserv solicited applications for title insurance in connection with LPI [lien protection insurance] program and that FATIC [First American Title Insurance Company] and UGT [United General Title] underwrote contracts of title insurance without first performing a traditional full and complete search of the public records because the HELOC loans were based in significant part on the borrower's personal credit and the lenders agreed to adopt and implement acceptable and contractually required underwriting standards that would minimize the risk of the borrowers defaulting, which would concurrently minimize the risk of loss under the LPI policies, and that these were to include the lender reviewing credit reports, reviewing a borrower's loan application, interviewing the borrower, and analyzing this and other information to confirm who owned the real property collateral and what liens encumbered it, among other matters.

As I documented in March, after Radian Group had started marketing a no-title-search lien protection insurance product in several states in the early 2000's, the American Land Title Association warned repeatedly about the pitfalls of this very kind of no-search title insurance-- referring to it as "a great danger", and "[a threat to] the integrity of public land records."  I wrote:

...ALTA argued that no-search lien protection products were inherently inadequate to the task of insuring home equity loans and HELOCs.  James Maher, then Executive Vice President of ALTA, warned that mortgage impairment products didn't "measure up" to traditional title insurance.  "[T]here is a great danger to lenders and borrowers who may be misled into believing that what they are getting from Radian and other sellers of similar mortgage impairment products is comparable to standard title insurance," Maher told Realty Times Magazine.

ALTA has also frequently argued that products like Radian's were detrimental to the integrity of the public record by virtue of the fact that no title search was performed.  "[T]he public land title records will not be revised and corrected on a regular basis.  Instead, there may be numerous real property transactions affecting the property in which defects to the public land title records occur," ALTA said in a 2002 paper.  In a public statement reported in the July 2008 issue of ALTA's TitleNews newsletter, ALTA CEO Kurt Pfotenhauer said: “Mortgage impairment/lien priority insurance offered by property and casualty companies violates state laws, puts lenders and consumers at risk, and because no title search or corrective [work] is performed, it threatens the integrity of public land records—the bedrock upon which real estate ownership in this country is built.”

But at the same time ALTA was making those statements, all of the "Big Five" underwriters were rolling out lien protection products similar to what Radian had marketed-- First American among them.  These companies' executives heavily populated ALTA's board and power hierarchy all during this time. 

In retrospect, ALTA's rhetoric about 'protecting the integrity of public records' seems to be at best hollow and at worst a purposeful smokescreen to make sure Radian and others got sidelined to pave the way for no-search title insurance issued by its most influential members. 

* * * * *

One of the claims that B of A made in its lawsuit was that prior to 2007, First American had paid the majority of claims that B of A had made under these lien protection policies.  However, after the housing bubble burst and there was a dramatic increase in the number of homeowners defaulting, B of A said that it began to discover a greater number of title defects, and therefore began to submit a greater number of claims due to losses caused by those defects.  It was then, says B of A, that First American "made significant changes to their claims handling practices and stopped paying claims similar to the ones the insurers previously had paid" under the same policy language. 

First American essentially acknowledges this set of circumstances, but gives a reason for the change in claims handling practices.  It says that it had originally paid claims under the assumption that B of A and Fiserv were submitting all relevant loan files and other documents as part of their claims submissions.  But then, First American says, "[a]s the volume of claims increased, some claims submissions included additional materials which had not [been] submitted with earlier claims, causing First American concern that other B of A submittals had not been complete.  First American then began requesting additional information regarding B of A's agreed upon, contractual and required lending practices and became aware [that] B of A's earlier submittals and many of its most recent submittals did not contain all of the necessary information... First American responded by requesting additional information from B of A... [including] B of A's underwriting guideline procedures and documents confirming B of A had followed them."  First American says that this information was needed to determine, among other things, whether B of A was entitled to these lien protection policies in the first place under the terms of their agreement.  According to First American, B of A  has not provided the requested information, and therefore, those claims remain outstanding.

So First American wants to make this case about B of A's underwriting practices.  And in fact, it talks a lot about B of A's underwriting in its counterclaim, saying that in late 2005, B of A's underwriting degraded and it began to fail to live up to the contractually required standards set by First American.

A "substantial number" of other claims remain outstanding, says First American, because it simply cannot determine the amount of B of A's loss-- or whether there is a covered loss at all-- from the claims documentation that has been submitted.  Without looking at the evidence concerning individual claims, your guess is as good as mine as to whether B of A has adequately documented its losses.  What's significant about this, however, is that since First American has gotten to the point in its claims handling process where it starts evaluating the amount of the loss, it likely means that it has satisfied itself that those claims are based on legitimate title problems covered by the policy. 

This leaves little doubt that in fact this kind of lien protection insurance has allowed a "substantial number" of title problems to go undetected and unresolved (until they cause a problem later, that is!).  I'm sure most folks who read this already would have suspected that, but First American implicitly confirms that here.