Title insurance – under the bonnet

Real estate solicitors frequently purchase title insurance to enable transactions that are affected by defective title. Often they concentrate primarily on the scope of the risk coverage as it relates to the premium levels, and place less emphasis on the insurance principles underpinning the product.

In fairness, title insurance is a truly niche product within the insurance industry, and even experienced insurance professionals find it difficult to grasp the concept fully. Further, the lack of standardisation of policy wording can make it difficult for solicitors to make worthwhile comparisons between different policies. That said, the use of the product as an essential risk management tool has matured over the past decade such that the market now has a wide choice of policies provided by a range of insurers.

In this context there is perhaps no better time than the present, when we are on the cusp of a property market up-cycle poised for increased mortgage lending, to explore the critical factors which differentiate these policies from other insurance policies and which arguably should be fundamental to the process of selecting one policy over another.

The “long tail” effect

Of paramount importance in the placement of title insurance coverage is the quality of the insurer that sits behind the policy. Title insurance policies fall within a very limited group of policies which are referred to in the insurance industry as “long tail policies”. Because they cover defects in title and are designed to run with the title to the property insured, the cover typically is provided in perpetuity. The financial rating and industry profile of the insurer are significant considerations. An insurer with a Standard & Poor’s A rating and which underwrites multiple lines of insurance, as opposed to single lines which expose it to systemic failures in the property market, would be preferable.

Beyond these initial considerations, the next factor should be whether the insurer is employing best practice in its reinsurance principles. All title insurers will reinsure risks with high limits of indemnity beyond a certain threshold so as to diversify their own risk exposure. A solicitor acting for an insured can therefore be reasonably expected to enquire as to the quality of rating of any reinsurers that sit behind the policy, and what mechanisms are in place to account for counterparty risk. Even on a low value residential transaction, it would be beneficial for the solicitor to demonstrate that some diligence has been undertaken in respect of insurer stability and risk management.

Specialist features

Step away from insurer financial stability, and of equal importance is the quality of the underwriting, policy design and the claims philosophy. While the duty to disclose all material facts has been relaxed in the case of a consumer, pursuant to s 2(2) of the Consumer Insurance (Disclosure and Representations) Act 2012, to a duty to take reasonable care not to make a misrepresentation, potential insureds in the commercial sphere are still required to disclose all facts which they consider to be material.

Given the highly specialist nature of the subject matter being underwritten, as clichéd as it may sound, the ability to directly engage with an underwriter who speaks the same language as a property solicitor, would ensure that disclosure requirements are more accurately met. Direct engagement with underwriters is of equal importance when negotiating policy wordings.

The other unique feature of title insurance is the necessity for and willingness of the insurer to enter into dialogue with solicitors to tailor the policy wording to match the transactional requirements. With that facility comes increased margin for error, and a level of trust in the quality of the underwriting becomes essential.

Trust is also crucial where claims resolution is concerned. A closed claims philosophy can have far-reaching implications for a solicitor’s relationship with clients. The judgment in Godiva Mortgages v Travelers Insurance Company [2011] EWHC 3687 (Comm), to be heard on appeal later this year, is the best illustration to date of the potentially catastrophic effect of the deployment of insurance loopholes to mitigate claims payouts.

Analysis

In 2005, the insurance industry broke with centuries of tradition to introduce the Lloyds of London Market Reform Contract, with the objective of standardising the insurance slip (coverage placement) so as to avoid practice loopholes. Without question, real estate solicitors are meticulous in their title diligence, and they embrace title insurance as a natural complement to the provision of optimum risk management to their clients. A necessary corollary to this risk management process is a proper analysis of those elements of insurance law and practice which enhance and improve that process, and which avert loopholes and ambiguities.