Cuts in Title Insurance Rates Sought

California Insurance Commissioner John Garamendi plans to unveil regulations today that could save homeowners an estimated $1 billion a year by slashing the premiums they pay for property title insurance, which he said are “excessively high.”

The regulations would force companies to cut rates an average of 23% on title insurance needed to close property sales. Rates on title insurance for loan refinancings would drop 16%, and the cost of some escrow services would decline by an average of 27%, according to the state Department of Insurance.

The price cuts could be in place by March 1 if the regulations, which are authorized by a 1974 law, receive final approval this year by the Office of Administrative Law.

Title insurance is required by lenders to guarantee that there are no other ownership claims, such as tax liens or utility easements, on a property they are financing.

The rate is generally a percentage of a property’s sales price. Premiums charged by different companies, which are generally paid by the sellers, can run as high as $2,500 on the sale of a $750,000 house, according to a broker’s rate sheet.

“I am taking strong action to force insurers to lower their rates, while keeping more money in the pockets of consumers,” Garamendi said Wednesday. He has news conferences scheduled today in Los Angeles and Sacramento.

Garamendi said he decided to act after a number of studies found little competition among a handful of large title insurance companies that dominate the $4.5-billion-a-year industry.

Title insurers countered that their prices were fair and competitive. Profits, even in the best years, do not exceed 10% of revenue, even though revenue has risen faster than costs during the recent boom in the California real estate market, they said.

Lawrence Green, executive vice president of the California Land Title Assn., a Sacramento-based trade group, acknowledged that title insurance revenue had soared in recent years, but he added that it was needed as a cushion for the inevitable slowdown.

Insurers said they would consider suing Garamendi if the regulations, which they contended were arbitrary, became law.

Consumers don’t need more government regulations and would be better served if they shopped around to get the best deal on title insurance, Green said .

In recent years, Garamendi has ordered three major title insurance companies to pay about $38 million in fines and refunds to settle allegations that they paid kickbacks to lenders, real estate brokers and builders.

The latest report, issued in December by Texas economist Birny Birnbaum, concluded that there was little price variation among the top six title insurance companies in California.

According to the Department of Insurance, which paid for Birnbaum’s report, only five companies control about 80% of the market. Historically, they have drummed up new business by paying incentives to real estate brokers and other professionals, who refer customers.

Insurers had hoped to reach an agreement with Garamendi to create an educational program, complete with an Internet site, to help homeowners cut their closing costs. They also have accused Garamendi, who is running for lieutenant governor as a Democrat in November, of political grandstanding.

Garamendi said his office had been working on lowering title insurance rates for three years.

Garamendi said he worked closely with the industry, particularly Santa Ana-based First American, but was unable to overcome the reluctance of other companies “to develop a mechanism in which consumers actually would be able to compare prices, benefits and services.”

He noted that many home buyers and sellers did not find it easy to shop around and were inclined to let brokers and escrow companies take care of the many details involved in closing a real estate sale.

An educational program, even if an agreement with industry had been reached, would not have addressed the alleged excessive rates being charged by title insurers, Garamendi said. “We believe consumers are being seriously ripped off,” he said. “The premiums have ridden up with the escalating cost of houses.”

In other regulatory activity Wednesday, Garamendi announced a settlement with three insurance trade groups that he said would strengthen protections for disability insurance policyholders.

He said the agreement with America’s Health Insurance Plans, the Assn. of California Life and Health Insurance Companies and the American Council of Life Insurers eliminated the use of so-called discretionary clauses. Such language could allow an insurer to deny benefits to customers who file disability claims.

The agreement requires insurers to follow a strict definition of what constitutes a disability that prevents someone from working.