Just as the economy continues to recover from a downturn and a depressed real estate market, many title underwriters are recovering from past significant losses as a result of low volume and increased claims activity.  These losses had an impact on the liquidity of underwriters and led to numerous changes in underwriting guidelines.

Because of this, we have learned that it is important for lenders and homeowners to understand both the financial strength of the underwriters who are issuing title policies on their behalf as well as the coverage they may or may not be receiving.

Banks should be regularly monitoring the financial statements of title underwriters. When comparing the level of intangible assets, the leverage, and the liquidity of these balance sheets, it is evident that many companies carry a significant amount of debt and goodwill. As indicated by the losses reported by many national title underwriters, that goodwill ends up getting expensed through the income statement in down markets. In addition to looking at financials, banks can stay current on rankings published by title insurance ratings firms such as Demotech or LACE.

From a title insurance coverage standpoint, most of us know that there are situations too numerous to list that can cause a title disaster for the bank or its customer. Significant claims can and do arise from such things as mechanics liens, tax liens, encroachments, easements, and other defects impacting the title to real property. Since most title policies come with standard exceptions to coverage, banks need to understand the types of language in title insurance policies that can have a direct impact on their lien position and their customers' ownership rights in a property.

We are noticing that some title underwriters have been placing overly broad standard exceptions on policies that take away key protections from the bank and the bank's customer.   Often, banks and homeowners will see language on their policies that does not provide protection.

For example, when someone is buying a home where construction has been recently completed, there should be no exception on the owners' policy for mechanics liens. An exception listed as "Any lien or right to a lien for services, labor, or materials heretofore or hereafter furnished, imposed by law and not shown by the public records" does not provide coverage in this situation. 

Another red flag found on title policies would be a survey exception listed as "Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land.  The term encroachment includes encroachments of existing Improvements located on the Land onto adjoining land, and encroachments onto the Land of existing improvements located on adjoining land. Paragraph 2 (c) of the Covered Risks is hereby deleted." 

Finally, some policies are being issued with an exception that reads "Any matter first appearing in the public record prior to (date)." The exception is the result of a shortened search and removes the title coverage for everything recorded prior to the date in the exception.

One of the keys to mitigating title risk is to ensure your processors and risk managers have guidelines and understand how to evaluate a title policy for coverage. Virginia Title Center is fortunate enough to be an issuing agent for Investors Title Insurance Company, an underwriter that carries no debt on its balance sheet and has been consistently recognized as one of the most financially sound title insurance carriers in the industry. Please contact the agency should you need any information related to their position of strength that is unrivaled.