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    Free and clear?

    Title insurance guarantees the property you bought is all yours. It may come in handy when land speculators like Don Connolly come knocking.


    [Times photo: Kevin German]
    Carl Seamer and Klaire Kramer measure out a 15-foot-wide strip of their driveway that land speculator Don Connolly bought up between their two north Pinellas properties.

    By ROBERT FARLEY and KRIS HUNDLEY
    © St. Petersburg Times
    published June 30, 2002


    Carl Seamer and Klaire Kramer looked out their window in the High Point section of Pinellas County one afternoon a few months ago and saw a stranger pushing a surveyor's wheel around their front yard.

    The charts
    Title costs: an example
    Title insurance costs and losses
    How they differ: title insurance vs. property/casualty insurance
    It was land speculator Don Connolly. He told the couple he had bought a 15-foot-wide strip of land between their two properties. He was willing to sell it to them for $25,000.

    The news sent the couple scurrying for their real estate documents. The survey confirmed that the two lots abutted each other. How could Connolly have purchased a sliver of land between the two? And wasn't this the kind of thing title insurance should have caught?

    Lucky for them, they're protected. Title insurance is "going to attempt to straighten it out or settle it," Klaire Kramer said.

    Connolly, who has turned delinquent tax deeds into headaches for homeowners throughout the Tampa Bay area, is also a nightmare for title insurers. They are the companies that are supposed to ensure the property you buy is all yours.

    At least 20 percent of Connolly's purchases are slices of land between properties, parcels that a title examiner may have missed somewhere along the line. In those cases, it may be insurers who end up footing the bill to fight Connolly or pay him off.

    It's unusual for the title industry to take such hits. Title insurers pride themselves on catching problems before they issue a policy. The result: The industry brought in $9-billion in premiums nationwide last year, but paid out only about 5 percent in claims. In Florida, title premiums amounted to $865-million in 2001; total claims were $37-million or just 4.2 percent.


    What is title insurance?

    Title insurance guarantees that a property being purchased is free and clear of any prior liens or ownership disputes. Lenders require title insurance when money is borrowed to buy a home. If owners want their interests protected, they must buy a separate owner's policy.

    How do I choose a title agent?

    Though real estate brokers often suggest a buyer use a specific title agent, homebuyers can select any title agent licensed to operate in the area. They can check the agent's record for any disciplinary procedures with the Florida Department of Insurance. The insurers who underwrite the policies also file annual financial reports with the DOI showing premium revenue and claims paid.

    Should I call my title insurance company if a land speculator like Don Connolly purchases a property next to mine and makes an offer to sell it to me?

    Probably not, unless you believe you already own the property in question. Title insurance covers only your property as shown on your survey. But your title insurer may be on the hook if someone else claims to have purchased land you thought you already owned.

    Title coverage is often lost in the flurry of papers that accompany a real estate closing. Now Connolly's purchases have put a spotlight on such policies. Demanded by lenders and generally ignored by homeowners, title insurance is a lucrative, powerful and little understood industry.

    Some critics say the rates are ridiculous. Others say exceptions to policies mean homeowners don't get what they pay for. But for some homeowners challenged by Connolly, at least, the policies have proven to be invaluable.

    Buying boom fuels title business

    As home sales have hit record highs over the past 18 months, the title business has boomed. There are now 1,704 licensed title agencies in Florida, compared to 711 in 1995.

    Title insurance guarantees that a property being purchased is free and clear of any prior liens or ownership disputes. It comes at a one-time premium and lasts as long as homeowners own their homes. Lenders require such insurance when money is borrowed for a home. Owners have the option of buying a policy as well, though if they decline coverage, their interests won't be protected should a challenge arise.

    In the Tampa Bay area, most owners opt for the coverage for a simple reason: Local custom is that the home seller pays for the owner's policy while the buyer pays for the lender's protection.

    Florida is one of only three states that set -- or promulgate -- title insurance rates, but that's far from negative for the industry.

    "The title guys love promulgated rates," said David Cox, an independent insurance actuary in New Mexico. "Try to get it repealed and they'll fight you tooth and nail."

    Cox should know. In 1999, he prepared a report on title insurance rates for the Florida Department of Insurance. His conclusion: Title insurance rates in Florida should be reduced by 9 percent.

    Bill Nelson, then head of the department charged with setting rates, took up the challenge and tried to slash title premiums, only to discover the power of the title insurance lobby. In an unprecedented move, the Legislature took rate-setting powers away from the Department of Insurance and froze them for three years. The law expires at the end of this month.

    Norwood Gay, senior vice president and general counsel for Attorneys' Title Insurance Fund Inc., the largest title insurer in the state, said the Legislature took control of the situation because insurers did not trust the Insurance Department to enact rates the industry had negotiated.

    "We demanded the Legislature adopt a statute," Gay said. "And though that law goes away this month, not to worry. The Insurance Department has already adopted a rule saying the existing rates will continue."

    That means title insurance on a $100,000 home loan in Florida is $575, or $5.75 per thousand. Rates per thousand decline as home value increases. Most homebuyers and sellers pay the premiums without complaining, barely noticing them listed on the closing statement along with related -- but unregulated -- fees for such services as title search, examination and closing costs.

    At a home closing, the title agent is the ringmaster, passing documents for signatures, collecting checks and issuing payments out of an escrow account once all details are finalized. A buyer, dazed by the process, stashes the paperwork, grabs the key to his new home and never thinks of title insurance again.

    People like J. Robert Hunter think they should. Hunter, an actuary, was insurance commissioner in the early 1990s in Texas, one of the other states, along with New Mexico, that regulate title insurance rates. He's now director of insurance for the Consumer Federation of America in Washington, D.C.

    "The rates are way too high because title insurance is basically a monopolistic system and the homeowner is captive -- they know you need it," Hunter said. "Everybody around the closing table is making money on title insurance. It's a money machine."

    Hunter said he refused to buy owner's policies on his own homes. "They exclude everything that's at risk anyway, so why buy it?" he said of policies that contain exceptions for things like a neighbor's fence on your property or a sewer line easement.

    Hunter suggests the United States should adopt the title system used in several countries where a home buyer and lender simply purchase an add-on policy that covers only the previous owner's period of occupancy.

    "If someone's owned a house for two years, you simply look back two years to see if there are any liens," Hunter said. "Every previous owner is responsible for his own piece in perpetuity. With computers, it should be simple."

    Searching through history

    photo
    [Times photo: Cherie Diez]
    Jay Molony, Stewart Title of Pinellas' data plant manager and title examiner, says, "You have to be a little bit of a historian and a little bit of a detective."
    Kevin M. Hussey, president and chief executive of Stewart Title of Pinellas, quickly dismisses Hunter's suggestion as unrealistic.

    "In that instance, you'd be hoping another title company did its job right the last time," he said. "We usually go back at least to the plat or 30 years, to the point where our examiner has a comfort level with the property."

    Hussey has been doing title work in Pinellas County for 30 years, handling up to 5,000 searches each year. Only a small percentage result in claims to Hussey or his underwriter, he said, because of the upfront work done by his searchers and examiners.

    "There's a tremendous amount of responsibility on the closing agent to do his work thoroughly to obviate problems," Hussey said. "We're ensuring that when the closing is completed everybody has the property they bargained for."

    Hussey said while the loss ratio is low for title insurers, the expense of preventing claims from ever happening is extraordinary. The agent's commission is proportionately high: By state law, agents keep 70 percent of the premium; 30 percent goes to the underwriter. A 1999 court order said home buyers can try to get a rebate on the agent's commission, but Hussey said that seldom happens.

    "I can see negotiating in larger transactions," said Hussey, who has 70 employees in 14 offices. "But I don't have much room to work on residential deals."

    One big expense, he said, is his agency's data plant in St. Petersburg. Jammed with hand-written tract books and stacks of microfilm, the office holds records of all deeds, tax liens, probate records and divorce decrees affecting every property in the county. The oldest tract books date back to the 1870s; a document from 1931 records an IRS lien on property owned by mobster Al Capone. The documents are updated daily with microfilm of new court records.

    Jay Molony, Stewart's data plant manager and title examiner, has been researching such court records for 28 years. "You have to be a little bit of a historian and a little bit of a detective," he said, flipping through yellowed property records from the early 1900s. "About 60 percent of the time, I find some issue that's got to be resolved before we close."

    But oversights and errors are inevitable. Cox's 1999 report to the Insurance Department said that from 1994 to 1996, there were 8,569 title insurance claims. Of those, nearly 40 percent were attributed to searching or examination errors. Another 5 percent were due to fraud or forgery of court records. Other problems arose from undisclosed heirs, undiscovered liens and problems with the survey or property description.

    [Times photos: Cherie Diez]
    The data plant at Stewart Title of Pinellas is jammed with Pinellas County tract books dating back to the 1870s (above). The pages at right feature entries starting in 1876.

    Title insurance not foolproof

    For Kittie and Duncan McClain, title insurance kicked in when the owner of a vacant lot next to their Seminole home said he wanted to start using an old easement across their property, one right through their Florida room. Title insurance lawyers eventually had the neighbor's easement rights removed in court.

    Clearwater lawyer Marty Awerbach, who has been representing title insurers since 1986, said a recent case involved four stepbrothers and stepsisters who came forward after the sale to claim interest in their dead parent's home.

    In another case, a man got divorced in Florida, remarried in New Jersey, then got remarried again to the first wife. However, he neglected to get divorced from the second wife. When he died, the second wife sought the property.

    Those kinds of errors would have slipped through no matter how carefully a title agent searched the public records, Awerbach said.

    In two cases where speculator Connolly purchased sections of people's properties, Awerbach said oversights in the title search allowed the problems. In the case of Robert Jones' St. Petersburg home -- which Connolly claimed to have purchased half of -- the insurance company settled with Connolly for $16,500, Awerbach said.

    Awerbach's firm is also representing Tampa Heights' homeowner Luella Williams, who is fighting Connolly's attempts to sell her property and split the proceeds. Though the title agency that researched Williams' parcel has gone out of business, the underwriter is covering the claim.

    While title insurance is making these homes whole, it cost the owners their peace of mind. Jones was so upset, he moved out of his home for five weeks, afraid Connolly might follow through on his threat put a barrier between the living room and bedrooms in the 1,100-square-foot home.

    Chris Sanders, a lawyer who runs his own title agency, said while Connolly may have made the situation worse, title companies are to blame for creating the opportunity.

    "Yeah, the homeowners were covered, but it was definitely an inconvenience for the homeowners," Sanders said. "If they had caught the problem prior to the transaction, this would never have been an issue."

    Insurance doesn't solve all disputes

    What many of Connolly's new neighbors have discovered is that most of his purchases do not enter the realm of title insurance. In most cases -- like the pink fence erected partway around a lake in Tarpon Woods and the submerged land near South Pasadena -- Connolly purchased property adjacent to interested neighbors. Title agents bear no blame or responsibility in those cases, Hussey of Stewart Title said.

    In fact, Hussey said, he handled a deal 10 years ago in which developer Lon Wadsworth built more than 32 homes around a lake in Pinellas Park. Wadsworth kept the lake property. But when the county deemed that property taxable, Wadsworth divided up the lake and offered to give it to the residents. Although free, the property would have carried an annual tax of $15 to $20 per homeowner per year. Most of the homeowners balked.

    At least one of those parcels ended up at delinquent tax sale. And Connolly bought it.

    "Here's a builder trying to do the right thing, and the homeowners just refused it," Hussey said.

    Hussey said there are always going to be errors made in title searches. Those in the business of exposing and exploiting those errors for profit have "gone to the dark side," he said. "There you can make a ton of money fast."

    Title hawks like Connolly are not the only controversial issue in title insurance. Some agents take off with the escrow funds, and homeowners have to be bailed out by the insurer. In the last five years, the state has investigated 10 cases of suspected fraud. Nine ended with criminal conviction against the agents; the last is pending. Since 1999, the state also has closed out 29 investigations into allegations that title agents ran afoul of the state's insurance code. Of those, just eight were found to have merit: one ended with a license revocation; and seven others ended in suspended licenses.

    "I believe the industry is self-regulating in a number of ways," said Phil Fountain of the Department of Insurance. Hefty security deposits are required of agents, and underwriters are on the hook for agents who abscond with escrow accounts.

    While the state investigates agent fraud, the U.S. Department of Housing and Urban Development has been trying to crack down on title companies trading favors for referrals from real estate brokers. Several local agents complained that competitors often supply brokers with free marketing or other services, in violation of HUD policy that prohibits title agents from giving "any fee, kickback, or thing of value" in exchange for a referral.

    Hussey said HUD investigators have talked to several real estate and title companies in the area about possible illegal activity. A HUD spokesman said the agency never comments on the status of an investigation.

    Consumer advocate Hunter said homebuyers who automatically take their broker's recommendation for an agent or don't haggle over price are making a big mistake.

    "Buyers are trusting somebody in system is making sure it's fair," he said. "They're wrong."

    -- Times researcher John Martin contributed to this report. Rob Farley can be reached at farley@sptimes.com or (727) 445-4185. Kris Hundley can be reached at hundley@sptimes.com or (727) 892-2996.

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