FINANCIAL AND INVESTMENT MANAGEMENT
POLICIES OF TITLE INSURANCE COMPANIES
ORANGE WILLIAM HALL
A DI:iF.TAfTO.N FPEi NTED TO THE GRADUATE COUNCIL OF
THI LNI ERSITY OF FLORIDA
[N P.ITL.LL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEuPEE OF DOCTOR OF PHILOSOPHY
LUNIVERSmY OF FLORIDA
Orange William Hall
The writer expresses sincere appreciation to Dr. C. Arnold
2Matthers, Head of the Department of Finance and Insurance and Chair-
Iran of the Supervisory Committee, for his innumerable suggestions,
constant advice and guidance, and great patience throughout the
course of this work.
The writer acknowledges his indebtedness to Mr. James G.
Richardson, Associate Professor of Finance, for the proposal which
led to this study of title insurance. The writer also is indebted
to Mr. Richardson for a number of ideas and suggestions on sources
of information and aspects of title insurance which needed investi-
gation or amplification.
The writer is indebted to Dr. William V. Wilmot, Jr., Head of
the Department of Management and Business Law, for a very close read-
ing of the manuscript and a suggestion which improved the criteria by
which Hypothesis No. 2 vas tested.
To the other members of the Supervisory Cozmittee, the writer
expresses his appreciation for their counsel and help.
Gratitude is expressed to a-s. Carolyn Lyons for her very
capable and conscientious typing under severe deadline pressure.
Finally, the writer acknowledges that it was his wife,
:arjorie Adeline, who made the gre.sest sacrifices during the pro-
duction of this work, not only in shared mc-tal anguish but in
sustaining a lingering physical impairment as a result of transcribing
so rany annual statements.
TABLE OF CONTENTS
ACKNOWLEDGENTS . . . . . . . . . . . iii
LIST OF TABLES . . . . . . . . . . v
INTRODUCTION . . . . . . . . . . . 1
I. THE BACKGROUND OF TITLE INSURANCE . . . . . 8
II. TITLE INSURANCE . . . . . . . .... . 23
III. DESCRIPTION OF THE INDUSTRY SAMPLE . . . .. 51
IV. DEGREE OF RISK IN TITLE INSURANCE UNDERWRITING ... 63
V. PROFITABILITY OF THE TITLE INSURANCE INDUSTRY AND
ITS CAPABILITY OF MEETING FINANCIAL OBLIGATIONS . 90
VI. CAPACITY TO INCUR INVESTMENT RISK AND SUITABILITY
OF INVESTMENT POLICY. ... . . . . . 116
VII. SUMMARY AND CONCLUSIONS . . . . . . . 144
APPEI DIX . . . . . . . . . . . . . 155
BIBLIOGRAPHY . . . . . . . . . . . .. 174
LIST OF TABLES
1. Title Companies in Sample . . . . . . 53
2. Aggregate Income Statement for Thirty Companies
Year 1963 ....... .. . ......... . 59
3. Aggregate Blance Sheet for Thirty Companies
As of December 31, 1963 . . . . . . . 61
4. Losses by Cause ... . . . . . . . . 74
5. Loss/Premiums Earned Ratios for Five-Year Period
1959-1963 and Each Year Thereof . . . . . 81
6. Loss/Total Operating Income Ratios for Five-Year
Period 1959-1963 and Each Year Thereof ...... 82
7. Losses, Premiums Earned, and Total Operating Income
by Group for Period 1959-1963 . . . .... 83
8. Loss/Premiums Earned Ratios for Group A Arrayed
in Order of 1959-1963 Loss Ratios ......... 84
9. Loss/Total Operating Income Ratios for Group A
Arrayed in Order of 1959-1963 Loss PRtios ..... 85
10. Loss/Premiums Earned Ratics for Group B Arrayed
in Order of 1959-1963 Loss Ratios . . . ... 86
11. Loss/Total Operating Income Ratios for Group B
Arrayed in Order of 1959-1963 Loss Ratios ..... 86
12. Loss/Premiums Earned Ratios for Group C Arrayed
in Order of 1959-1963 Loss Ratios . . . ... 87
13. Loss/Total Operating Incom= Ratios for Group C
Arrayed in Order of 1959-1963 Loss Ratios . . .. 87
14. Percentage Composition of Assets as of
December 31, 1963. .. . . . . . . . . 92
15. Rates of Return Authorized in Utility Rate Decisions . 97
16. Earnings Availablu for Common Stock as Per Cent of
Average Common Equity 188 Electric Utilities . . 93
17. Operating Profits as Per Cant of Operating Assets . 100
18. Operating Profit Margin and Turnover of Operating
Assets, Period 1959-1963 . . . . . . .. 102
19. Investment Yields . . . . . . . . . 103
20. Aggregate Blance Sheet for All Companies as of
December 31, 1963 . . . . . . . . .. 104
21. After-Tax Profit as Per Cent of Net Worth for Five-
Year Period 1959-1963. . . . . . . . 105
22. After-Tax Profit as Per Cent of Net Worth for
Group A Companies Arrayed in Decreasing Order . .. 106
23. After-Tax Profit as Per Cent of Net Worth for
Group B Companies Arrayed in Decreasing Order . .. 107
24. After-Tax Profit as Per Cent of Nat Worth for
Group C Companies Arrayed in Decreasing Order . .. 107
25. Net Worth as Percentage of Total Liabilities . . .. 112
26. Number of Times Losses Earned Before Taxes . . .. 112
27. Ratio of Increase in Statutory Premium Reserve to
Losses Incurred . . . . . . . .... 113
28. Total Statutory Premium Reserve as of December 31,
1963 as Per Cent of Losses for Period 1959-1963 . 114
29. et Worth to Liabilities Ratios as of D -cember 31,
1963 . . . . . . . . . . . ... 127
30. Nict Worth to Liabilities Ratios After Adjustment
for Equity in Premium Reserves . . . . .... 123
31. Cash, Bonds and Liabilities as Per Cent of Total
Assets as of December 31, 1963 . . . . . 128
32. Cash Plus Bonds to Liabilities Ratios Aajusted for
cEuity in Premium Reserves . . . . . .... 130
33. Loss and Expense Ratios, Operating Profit (Loss)
Margins 1963 . . . . . . . . . . .. 131
34. Percentage of Assets in Common and Preferred Stocks 135
35. Common Stocks as Per Cent of Total Assets as of
December 31, 1962 . . . . . . . .... 136
36. Common Stocks as Per Cent of Total Assets Title
Insurance Companies . . . . . . .... 136
37. Common Stocks as Per Cent of Total Assets as of
December 31, 1963 . . ... ........... 138
38. Capital Appreciation From Year-End 1959 to Year-
End 1963 . . . . . . . . . . . 139
39. Capital Appreciation as Per Cent of Beginning
Net Worth . . . . . . . .... . .. 140
40. Common Stocks as Per Cent of Net Worth as of
December 31, 1962 . . . . . . . . .. 141
41. Common Stocks as a Per Cent of Surplus as of
December 31, 1962 . . . . . . . . .. 142
42. Individual Company Aggregate Losses, Premiums
Earned and Total Operating Income for the Five-
Year Period 1959-1963 . . . . . . . .. 156
43. Losses, Premiums, and Total Operating Income by
Years and Five-Year Totals . . . . . .... 157
44. Losses, Premiums, and Total Operating Income for
the Five-Year Period 1959-1963 . . . . ... 158
45. Losses, Premiums, and Total Operating Income
Year 1959 . . . . . . . . . . 159
46. Losses, Premiums, and Total Operating Income
Year 1960 . . . . . . . . . .. 160
47. Losses, Premiums, and Total Operating Income
Year 1961 . . . . . . . . . .. 161
48. Losses, Premiums, and Total Operating Income
Year 1962 .................... 162
Losses, Premiums, and Total Operating Income
Year 1963 . . . . . . . .
Operating Profits and Assets .
Investment Income and Investment
After-Tax Profits and Net Worths
After-Tax Profits and Net Worths
After-Tax Profits and Net Worths
After-Tax Profits and Net Worths
After-Tax Profits and Net Worths
After-Tax Profits and Net Worths
Liabilities and Net Worth . .
Assets . .
1959 . .
1960 . .
1961 . .
1962 . .
1963 . .
59. Common Stocks and Total Assets . . . .
60. Operating Revenues and After-Tax Profits
1959-1963 . .. . . . .
. . . 163
. . .. 164
. . .. 165
. . .. 166
. . .. 167
. . .. 168
. . .. 169
. . .. 170
. . .. 171
. . .. 172
. . .. 173
. . .173
This is a study of the title insurance business. Title insurance
is a very small segment of the giant insurance industry; and probably
because of its relatively small size very little research has been
devoted to it. The only reasonably comprehensive treatment of the
subject is Gage's Land Title Assuring Agencies in the United States,
which covered the status of title insurance as of the early 1930's.1
But the important development of title insurance has occurred since
the 1930's; its increase in importance has been concomitant with the
huge expansion of home building and other construction which has occurred
since the end of World War II. Real estate activity in the post-war per-
iod has been stimulated by high rates of family formation, general pros-
perity, and the mortgage insurance and guaranteeing programs of the
Federal Government. Title insurance is, of course, closely dependent
upon real estate activity, particularly mortgage lending. The develop-
ment of mortgage financing on a national scale and the secondary mortgage
market fostered by the Federal National Mortgage Association have been
important influences on the expanding use of title insurance in recent
decades. For lending operations on a national scale, mortgagees need
the assurance of good title which title insurance provides.
1Daniel D. Gage, Jr., Land Title Assuring Agencies in the United
States (San Francisco: The Recorder Printing and Publishing Co., 1937)
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In addition to Gage's book there are a limited number of other
sources of information on title insurance. Johnstone's article Title
Insurance which appeared in the Yale Law Journal is an excellent concise
treatment of certain aspects of the subject.2 The New York State Insur-
ance Department's multi-volume work Examination of Insurance Companies
has a chapter devoted to title insurance in each of Volumes 1 and 4.3
The book Public Regulation of Title Insurance Companies and Abstracters,
written by members of the faculty of the Villanova University School of
Law, is a comprehensive treatment of regulatory aspects.4 The American
Title Association's monthly periodical Title Eews is an important source
of general information on title insurance, including some historical
studies of the loss and claim experience of the industry. Very few
other operating statistics have been published.
In fact, title insurance industry statistics have not been
readily available. Best's Insurance Reports do not include title
insurance companies in their compilations. Annual reports of state
insurance commissioners provide very brief coverage of title insurance
companies. The best sourcesof data on title insurance company operations
are the annual statements filed by all companies with the various state
insurance departments in which they do business. The data for this
2Quintin Johnstone, "Title Insurance," Yale Law Journal
(February, 1957), PP. 492-524.
3New York State Insurance Department, E:amination of Insurance
Companies (N. Y. State Insur. Dept. Vol. 1, 1953, Vol. 4, 1954)
Ernest F. Roberts, Jr., et. al., Public Regulation of Title
Insurance Companies and Abstracters (Philadelphia: Villanova Univer-
sity Press, 1961)
study have been obtained from this source, and they are believed to
be the only such compilation in existence.
Title insurance is a snail but rapidly growing industry, which
is increasing in importance. It has important economic effects in
improving the free alienability of land, and the marketability of
loans secured by mortgages. It poses a problem to innumerable home
owners in deciding whether or not they need its protection, but, in
general, the facts about title insurance are little understood. The
study of title insurance, which will be reported in the chapters which
follow, was recommended to the writer as something that "needed doing."
This study addresses itself to an analysis of the financial
and investment management aspects of title insurance. It has as
its principal objective the solution of two problems. These are
(a) The degree of risk inherent in title insurance under-
(b) The basic profitability of the title insurance business
under existing premium rates, losses and expenses incurred;
(c) The capability of title insurance companies to meet
the financial obligations which they assume in idemnifying
policyholders against title defects.
(a) The investment risk capacity of title insurance companies;
(b) The extent to which title insurance company investment
policies are in harmony with the nature of their liabilities,
their capability of incurring investment risk, their tax status,
and the best interests of their stockholders, consistent with
maintenance of financial responsibility and the protection of
To provide an approach to the solution of these problems, the
following hypotheses have been formulated:
1. The risk inherent in underwriting land titles against defects
is of a low degree.
2. Title insurance is a very profitable business.
3. The capability of title insurance companies to meet their
financial obligations is very high.
4. The capacity of title insurance companies to incur invest-
ment risk is greater than that of fire and casualty insurers.
5. Title insurance company investment policy is characterized
by greater conservatism than necessary for the reasonable protection
These hypotheses will be tested in this manner: The actual
operating experience, losses and expenses incurred, and resulting
financial condition of an industry sample will be analyzed for the
five-year period 1959 through 1963. These data will be measured against
certain criteria and standards, to be developed in Chapters IV, V, ani
VI, designed to permit conclusions to be drawn as to the validity of
the hypotheses as stated.
Briefly, solution of Problem I (a) (testing of Hypothesis No. 1)
will require examination of the types of title insurance policies issued,
the types of title defects normally insured against, the frequency and
extent of losses resulting from these defects, the extent to which a
title insurance company has control over its losses, and the unavoid-
able element of uncertainty which remains.
Profitability, Problem I (b), will be measured against con-
ventional standards of operating margin, earning power of operating
assets, return on investment assets, and rate of growth of earnings.
Solution of Problem I (c), financial capability, will require
consideration of parts (a) and (b) above and also minimum capital and
deposit requirements, statutory premium reserves, practices with respect
to building up surplus from earnings, the ratios of losses incurred to
earnings available for payment of losses, and the ratio of losses to
statutory premium reserves.
Problem II (a), assessment of investment risk capacity, will
require consideration of all aspects of Problem I, that is, the risk
element or uncertainty in title insurance, profitability of the industry,
and its financial strength. In addition, the nature of the liabilities,
and the relative proportion which total liabilities bear to total assets
must be considered. In general, the conclusions with respect to invest-
ment risk capacity depend upon the conclusions for parts (a), (b), and
(c) of Problem I.
Similarly, an assessment of the suitability of investment policy,
Problem II (b), will depend upon conclusions as to the nature of the
liabilities of title insurers, and their capacity to bear investment
risk. Other factors to be considered are: the tax status of these
companies and institutional customs or requirements which act as re-
straints. Limitations on investment freedom imposed by state regula-
tory agencies and statutes are further restraints to be considered.
Organization of the Work
Chapter I will develop the background of title insurance, its
antecedents and institutional setting.
Chapter II will be devoted to a general description of the
title insurance business, its origin, development, and current status.
In Chapter III, the industry sample will be described, together
with typical operating practices, financial and investment practices
which are evident from the sample data.
In Chapter IV standards and criteria for determining the degree
of underwriting risk inherent in title insuring will be developed, and
actual operating results will be measured against these criteria to
provide a test of Hypothesis No. 1.
In Chapter V standards and criteria for determining profitability
of the title insurance industry and its ability to meet financial
obligations will be developed; the emperical data will be compared
with these standards to provide tests of Hypotheses No. 2 and 3.
In Chapter VI, criteria for assessing the investment risk
capacity of title insurance companies and the suitability of their
investment policies will be developed; actual performance and financial
condition will be compared with the criteria developed to provide tests
of Hypotheses No. 4 and 5.
Chapter VII will summarize the conclusions.
TEE BACKGROUND OF TITLE IiEAITECE
Land Rights and Interests
The rights and interests which attach to land in a complex
society are themselves various and complex. In addition to fee simple
ownership there may be other types of interests in land, such as life
interests or estates, remainderman interests, leases, liens, easements,
rights of entry, mineral rights, and governmental or other restrictions
on the use of the property by the owner or lessee.
The different ways in which the rights or interests may originate
are also many and diverse. In addition to purchase or lease for a valu-
able consideration, rights may descend by inheritance or devisement;
they may arise through statutory enactment, legal interpretation, eminent
domain, judgment, marriage, divorce, adoption, and even simply continued
possession or use which is adverse to the owner of record.
A further factor complicating the status of rights in land is
the very long duration of some interests. The president of a New
York title insurance company made reference in 1953 to a piece of
property which had been purchased and its title transferred by deed
to the persons then in possession, following examination and approval
of the chain of title by an attorney. A more complete examination,
however, showed that the property, instead of being owned by those in
possession was held by a church society under a 999-year lease executed
in the latter part of the 18th century. The church society, which was
still in existence, owned a revSrsionary interest in the prcr-rty, how-
U. H. Crocker, writing in 1875, tells the classical story of
all time about muddled property rights (or the uncertain state of the
law of real property in Massachusetts in the 1860's).2 Mr. Crocker
relates how a William Ingalls, who had inherited a valuable piece of
Boston real estate from his father through his mother, and who was in
undisturbed possession of it in 1860, thirty years after his father's
death, nevertheless lost the property to two cousins who sued to col-
lect a specific legacy made to them by Ingalls' father at his death
in 1830. The statute of limitations did not bar an action to recover
The two cousins, in turn, very shortly lost the property to a
John Rogers who successfully proved to a court's satisfaction that a
previous owner, who died in 1750, had willed the estate in tail so that
descent had to be through the oldest male heir, if any, and that he,
John Rogers was the rightful surviving male heir. The statute of
limitations did not bar Roger's suit, entered in 1863, because he had
Henry J. Davenport, 'Title Insurance," Examination of Insur-
ance Companies (New York State Insurance Department, 1953),I, 305.
2U. H. Crocker, "The History of a Title," Minnesota Law
Review, XXII (1937), 129. Reprinted from American Law Review, X
- 10 -
inherited his interest through an uncle who had been an incompetent
all his 75 years of life and had not died until 1854.
Mr. John Rogers very shortly lost his newly acquired estate
to the heirs of a previous owner, a Benjamin Parsons, who had conveyed
the land to one Hosea Johnson simply, without any mention of Johnson's
"heirs." This conveyance was held by a court to be of a life estate
only, the ownership of the property reverting to Parsons' heirs upon
the death of Hosea Johnson. The statute of limitations did not bar
recovery by Parson's heirs due to these circumstances: Hosea Johnson
lived to age 97 and, at his death in 1786, the only heir of Benjamin
Parsons was a newly-wed granddaughter aged eighteen. The granddaughter
lived until 1861 and for the entire time was under the disability of
coverture (being married), thus her heirs had until 1871 to bring
In the final fillip to this stranger-than-fiction horror story
of a really uncertain title, William Ingalls, owner as the narration
opened, was able to recover the property by showing that one of his
ancestors had in 1660 sold the property with a restrictive covenant
in the deed prohibiting the erection of any building on a certain
portion of the land. This condition had just recently been breached
by the latest owner, a John Smith by now, therefore Ingalls was in a
position to enforce a forfeiture against Smith. This suit was settled
out of court to William Ingalls' complete satisfaction.
The foregoing extended illustration, although an extreme example,
is cited to emphasize that interests in land may indeed be complex and
- 11 -
that there is an inherent uncertainty as to the true status of titles
The American Recording System
The existence of diverse interests in land, their multiple
sources, and extended duration, lead to the development of the public
recording system in the United States. A Massachusetts statute en-
acted in 1640 made obligatory what was already the custom: that of
making a public record of transactions in land. The purpose was clear-
ly to safeguard the ownership of land and to preserve evidence of rights
in it for the benefit of all interested persons. The following ouo-
tation is from this early Massachusetts act:
For avoiding all fraudulent conveyances and that every-
one shall know what estates or interests other men may have
in any howses, lands, or other hereditaments they are to
deal in, it is ordered that after the end of this month no
mortgage, bargine, sale or grant hereafter to be made of
any howses, lands, rents or hereditaments shall bee of
force against any other person except the grantor and his
heirs, unless the same be recorded as is hereafter ex-
Recordation of documents affecting interests in land serves
to put third parties on notice, i. e., the legal doctrine of "construc-
tive notice" holds that everyone has knowledge of all documents which
have been recorded at the appropriate public office, normally the
office of the county recorder for land transactions. However, there
are other public records which affect interests in land, for example:
3Gage, op. cit., p. 25.
- 12 -
vital statistics dealing with births, deaths, marriages; court proceed-
ings involving divorces, probate of wills, bankruptcies, and other
decrees or judgments; records of taxes and special assessments; zoning
ordinances and local codes affecting the use of lands.
Certain weaknesses of the public record system, in disclosing
the true interests attaching to land, are evident: (1) the records
are not centrally located in one office; (2) they are poorly indexed
for the purpose of determining the interests in a particular parcel of
real estate; (3) the recording system cannot prevent some forgeries,
false impersonations, and other fraudulent practices; (4) the system
of manually transcribing inevitably results in some copying errors;
(5) documents are simply recorded, no interpretation of their effect
Abstracters and Abstract E:amirers
The very great difficulty of discovering and identifying all
evidences affecting interests in parcels of land, lead, at an early
period in American history, to this work being taken over by skilled
specialists, both in the searching and assembling of title evidence
and in the interpretation of the legal eLfect of the instruments found.
The specialist who searches the record is known as an abstractorr"
and the product of his work, a copy or brief of every document bearing
on the title, assembled in the chronological order in which each
instrument affected the chain of title, is known as an "abstract of
- 13 -
Only a person competent in the law of real property is qualified
to determine the legal status of a title from examination of the abstract.
The "abstract examiner" is normally a lawyer who specializes in real
estate transactions. Of course, thern are questions of law which ere
pure matters of opinion among lawyers, or which may be in process of
determination, or reversal of previous determination, by a court. To
the uncertainty of finding all title evidence is added the uncertainty
in the interpretation of the evidence found. The poem which follows,
authored by an unknown abstract examiner is an eloquent exposition of
The Abstract Examiner
This delving into musty lore,
'Midst legal cobwebs I deplore
And yet am bound to snoop around,
Where buried errors may be found,
And as the antiquarian rakes,
So I must search for old mistakes,
And though my own would keep from sight
Bring those of wiser men to light;
Like deeds not executed right,
Or misdescribing land or lot,
Or wife or husband who forgot
To sign or state was carried not;
Or notary who omitted to
Affix his seal when he got through
Or have a witness, witness to;
Or will some fine old banker drew,
But failed to tell how to construe;
Or mortgage paid, but not released
And held by assignee deceased;
Or corporation deed not sealed;
Or law amended or repealed
Or by decision nullified;
Author unknown, printed in Lawyers Title News,
- 14 -
Or case on which we had relied
Just overruled or modified
So as to raise some questions new
Of jurisdiction or venue;
Or case we chanced to overlook
Back yonder in old shelf-worn book.
And though John Doe had acted for
And thought he was executor
Of the estate of Richard Roe
Cum testamento annex
Was ab initio de son tort
As held by the Court of last resort,
For no petition for probate
Was ever filed in the estate
And though he made a full divide,
And all the heirs were satisfied,
And all the creditors have died
And fifty years have passed beside,
And though the statute has begun
For the third time its course to run
The Court may yet make dough of Doe
And all proceedings held below
Though I'm inclined to think the will
Will be the will of Richard still.
Title Registration, The Torrens System
The inherent inefficiencies of the system of public recording
of title evidences and the laborious review of the chain of title each
time a transaction in land occurs is acknowledged by many to be an un-
fortunate burden on the free alienability of land.
Land transfers in this country are slow, expensive and
uncertain matters. They require a degree of professional
supervision frequently disproportionate to the economic
interests created and have become increasingly complicated
and form ridden. It is more and more apparent that the
system employed is clumsy, wasteful, inefficient and not
in keeping with demands for social institutions of reason-
5John C. Payne, "The Crisis in Conveyancing," Missouri Law
Review, XIX (1954), 214.
- 15 -
A system of registration of the title itself (i. e., the owner-
ship, such as re are accustomed to for motor vehicles), rather than
recording the evidences of title, has been used successfully in other
countries, including Germany, Austria, Hungary, Switzerland, Australia
and New Zealand.
Title registration systems are frequently called Torrens systems
after Sir Robert Torrens, a British customs officer who was serving in
South Australia in the 1850's. Upon being appointed registrar general
of the province, in charge of registering the instruments affecting
titles to real estate, his experience in his former office with the
ship registry system lead him to inquire why the title to land could
not be registered the same as could the title to a ship. He demonstrated
that it was entirely possible, in that the statutes, called Torrens Acts,
passed in 1858, which he was instrumental in having adopted by Australia
were eminently successful and have since been enacted elsewhere.
As of 1935, nineteen U. S. states, the Philippines, Hawaii,
and Puerto Rico had enacted Tcrrens-type registration acts. Patton
cited the following reasons "why all titles should be transferred from
the recording system to the Torrens system."6
1. Elimination of loss of title due to adverse possession.
2. Elimination of necessity to defend one's title because of
forgery of one's name. A forger can accomplish nothing unless he also
has possession of the owner's duplicate record of title.
6R. G. Patton, "The Torrens System of Land Registration,"
Minnesota Law Review, XIX (1935), 519.
- 16 -
3. Ability to close real estate transactions with absence
4. Decrease in expense of transfer by deed (No expense to
the seller--nominal registration fee by purchaser).
5. Immunity from title clouds by docketing judgments against
persons of same name as a real estate owner.
6. Speed with which a title cloud may be cleared.
7. Only method of furnishing a title to land acquired by
accretion or reliction.
8. Title "marketable" and that condition always maintained.
9. Immunity from risk of loss or impairment from weaknesses
of the recording system (invalid instruments, fcr example).
The protection provided by the Torrens system is broad
but not absolute. Under this system the original appli-
cant brings an action similar to a quiet title suit, nam-
ing all known adverse claimants as defendants. After the
resulting decree a certificate is filed in the registrar's
office that is determinative of all rights and interests
in the land, and a duplicate copy is issued to the owner.
But for a period after the decree, it may be attacked by
certain persons who have been deprived of rights. In
addition, the holder of a certificate is not protected
from a few possible types of encumbrances, even though
they are not noted on the certificate. The Torrens statutes
provide for indemnity or assurance funds, established from
registration fees, to compensate those wrongfully de-
prived of interests in land through the negligence or
fraud of the registrars' staffs or others. In all im-
portant Torrens areas the funds are more than adequate.7
Although a simpler and more economical system than public
recording, Torrens registration has never realized its promise in
the United States. There are a number of reasons for this. (1) It
7johnstone, op. cit., p. 499.
- 17 -
has had strong opponents Twhose economic lives it threatened, title
insurance companies, abstracters, and important elements of the bar.
(2) Initial registration costs tend to be higher than the cost of
a title search, since a judicial proceeding is required. The financial
benefits of the system accrue only to subsequent transferees. (3) There
has been a lack of public understanding of, and demand for, the system.
(4) Registration has been voluntary under the American registration
acts, but has been mandatory in those countries where Torrens has been
successful. (5) Torrens titles do not provide for complete assurance
of title, initial registration may be attacked for a limited period,
and registration does not protect against all types of encumbrances.
(6) The registrars' offices have not been aggressive in their compe-
tition with the other system, and have done little advertising and pro-
The future of the Torrens system in the United States is bleak,
interest in it has declined, and eight of the nineteen states which
had passed Torrens acts have since repealed them. This method of
simplifying land transactions and assuring titles is evidently not
feasible under present institutional arrangements in the United States.
"Casting aside the entire system and starting over again at this time
is unthinkable. The universal adoption of the Torrens system is
believed by many not to be an advisable means of solution, and such
is probably not now feasible."9
Johnstone, op. cit., pp. 513-514.
9Paul E. Basye, "Streamlining Conveyancing Procedure,"
Michigan Law Review, XLVII (1949), 1097, 1128.
- 18 -
Other available methods, based upon the existing public record-
ing system, apparently must be depended upon to facilitate land trans-
fers. Curative legislation is one such method.
Curative and Limitations Acts
Curative acts are statutes that purport to validate
at once retrospectively certain past transactions or
proceedings, which theretofore were ineffectual because
there had been a failure to comply in their consum-
mation with legal requirements then in effect. 10
Such statutes were enacted in some states prior to the adoption
of the Federal Constitution, and they are now to be found in every state.
Commenting on U. H. Crocker's History of a Title (note 2 supra.), Edward
G. Jennings wrote in 1937:11
The facts Mr. Crocker narrates must have shaken the
faith and comfort derived from ownership of a fee simple
absolute in the sacred soil of Massachusetts . .
As a result of statutory changes in the common law
system of estates, all of the proceedings that occurred
subsequent to the recovery of their specific legacies by
GWilliam Ingalls' cousins) Arthur and William Jones would
have no basis in Minnesota today . .
A statute has been proposed for enactment that would
abolish the "worthier title" rule and thereby remove it
from all possibility of consequence in this state. If
this proposed statute is enacted, we will be able to
congratulate ourselves that no part of this story could
Limitations statutes are acts designed to remove ancient title
clouds and simplify title searches by cutting off stale claims after a
10James W. Day, "Curative Acts and Limitations Acts Designed
to Remedy Defects in Florida Land Titles," University of Florida Law
Review, VIII (Winter, 1955), 365.
11Minnesota Law Review, XXII (1937), 129.
- 19 -
reasonable period of time. The Michigan Forty Year Marketable Title
Act is an example of legislation to reduce the need for extended
searches of title records. The difficulty faced by such acts (in
addition to questions of constitutionality--earlier Pennsylvania and
Kansas statutes have been nullified as unconstitutional), is the multi-
plicity, long duration, and differing social value of various interests
in land. Professor Payne argues that reform legislation must recognize
the differing social value of different interests, with each interest
being limited to an appropriate period of time.12
Any such thoroughgoing reform must be said to be in its infancy,
only nine states have in effect time-period marketable title acts of
the Michigan type.13
Private title plants have been developed by abstracters in
response to the need for a method of more quickly and accurately deter-
mining the evidence of rights in parcels of land. To a considerable
extent, private title plants are duplicative of the public records,
since a complete title plant would contain copies or surmmries of all
instruments affecting land titles in the county. This duplication,
although economically wasteful, in another sense is justified by the
greater efficiency achieved by private title plants through use of
12Payne, op. cit., p. 214.
13Illinois, Indiana, lowa, Michigan, Minnesota, Nebraska,
North Dakota, South Dakota, Wisconsin.
- 20 -
superior indexing systems, designed with but one purpose in mind--to
facilitate rapid and accurate title searches. For this purpose, the
geographic or tract indexes used by private title plants are much
superior to the grantor--grantee indexes customary in public recording
Improved efficiency is obtained in several other ways. (1) The
"take-off" method used in reproduction of public records has been con-
stantly improved by abstracters, with photographic procedures now large-
ly supplanting more laborious manual methods which are still in use in
most public offices. (2) All old abstracts of record are maintained on
file. Thus a request for an abstract on a parcel of real estate previous-
ly searched requires only bringing the old abstract up to date, avoiding
needless duplication of effort. (3) General name indexes are used to
permit correlating the names of persons affected by court decrees, judg-
ments, divorces, probate actions, with the appropriate pieces of realty
involved. Such indexes are rare in public recording offices, and the
equivalent records would be scattered th-oughout a number of different
The stimulus provided the abstracter under the profit incentive
must be contrasted with the tendency of doing things in the time-honored
way which is common in public record offices. In addition, it is not
the sole purpose of the system of public records to provide a means of
rapidly producing title evidence. This purpose must be subordinated,
for example, to those of efficient administration of justice and the
levying and collection of taxes.
- 21 -
Whether or not an abstract company finds it profitable to main-
tain a plant depends on the volume of title search business done by
the company in the county. In counties of large population it is
usually profitable for at least one company to maintain a complete
plant, and frequently several do so. Conversely, in counties of
small population, it is more economical to base title searches on the
public records. The trend, however, is toward more title plants and
more complete title plants, even in smaller counties.14
Summary of Chapter I
At this point we have briefly reviewed the status of land
title assurance as it would exist in the United States without title
insurance. We have noted that there are uncertainties inherent in
land titles. After a skillful search for the title evidence contained
in the public records, and a competent lawyer's opinion on the legal
effects of the instruments found, there remains a degree of uncertainty
as to the true status of the total interests in a parcel of land. The
public records are seen to be deficient in some respects for the pur-
pose of identifying title evidence.
Torrens registration, probably the best system of title
assurance yet conceived, nevertheless has failed to win public
acceptance, and cannot now be considered a serious possibility for
improvement of our system of land transfer, given the strength of
its opponents and other institutional obstacles.
14Johnstone, op. cit., p. 508.
- 22 -
Curative legislation provides a means of validating old
instruments or conveyances which contain specified technical defects
vihich cloud or make dubious the status of a title. Limitations
statutes offer a means of reducing the burden of extended record
searches by extinguishing old claims after a reasonable period of
Creators of private title plants are able to justify the
duplication of public records by utilizing efficient methods of
"take-off," storage, and indexing, thus increasing the speed and
accuracy with which title searches can be made.
The development of title insurance as a means of insuring
one's interest in land will be treated in the next chapter.
TELE INS-URA CE'-
Definition of Title Insurance
A contract of title insurance is an agreement where-
by the insurer, for a valuable consideration, agrees to
indemnify the assured in a specified amount against loss
through defects of title to real estate, wherein the lat-
ter has an interest, either as a purchaser or oth-rwise;
a contract to indemnify against loss through defects in
title to real estate or liens or encuambrarces thereon.1
Origin and Growth of Title Insurance
Title insurance has the unique distinction of being the only
form of insurance invented in the United States and having its use
almost wholly confined to this country. It is of relatively recent
origin, having been written first in Philadelphia in 1876.2 From
Philadelphia the concept spread rapidly to W1ashington, D. C., New Ycrk,
and Baltimore, and gradually to most areas of the United States. By
1900 there were about twenty companies operating in the large cities
of ten states, and by 1920 there were approximately ninety-two companies
in some seventy-seven cities in thirty-three stat-c.3 By 1957, title
1Lyle F. Hilton, "Theories of Liability," Title News (May,
2Davenport, on. cit., p. 303.
3Gage, op. cit., pp. 83-84.
- 23 -
- 24 -
insurance was being written by 147 companies, of which seventy-seven
had more than one cutlet in their home state, thirty-one operated in
more than one state, but only eleven companies operated in five or
The extent of use of title insurance varies in different parts
of the United States. It is the dominant form of title protection on
the Pacific Coast and in many metropolitan areas. It is least used in
New England and in rural areas generally. Iowa is the only state pro-
hibiting the formation of a company to engage in the business of in-
suring titles to real estate. Policies on Iowa land are, however,
written outside the state; so that title insurance has been written on
some land in every state.5
Unique Characteristics of Title Insurance
Cite insurance has several characteristics peculiar to it
alone. It is the one insurance that undertakes to indemnify against
loss or damage arising out of matters that have already occurred in
the past rather than those that may occur in the future. In title
insurance, a yet unknown but already existing defect in title or
cause for claim is the risk insured. In other lines of insurance, a
happening in the future is the risk insured. In other words, other
types of insurance coverage begins where title insurance coverage
ends--as of the effective date of the policy.
4johnstone, op. cit., p. 492.
5Ibid., pp. 492-493.
- 25 -
Title insurance requires but a single premium, payable when
the policy is issued, but its coverage continues without termination
or time limitation, for as long as the insured can suffer a loss.
A title policy cannot be canceled by either the company or
the insured. Other policies of insurance, with minor exceptions,
can be canceled by either party.6
The Need For Greater Title Assurance
Title insurance was developed in response to a den-nd for
more positive title assurance. A number of factors which contributed
to this demand can be identified. (1) The ~po.ing complexity of the
economic order led to higher uses and higher values for advantageously
located urban land. (2) The growth of the corporate form of organi-
zation led to larger accumulations of capital, and a consequent need
for large land areas for business purposes. (3) The growth of large
financial corporations led to large-scale lending on real estate
security. These large lenders, often living in cities apart from the
land and the borrowers, were continually seeking the most reliable
proof of title. (4) The intricacies of urban land utilization led to
a multiplication of the prcblcms involving boundary lines, encroachments,
easements, rights of entry, leases, mortgages and liens. (5) Large
scale immigration brought thousands of new residents to the cities,
many with strange sounding names and spelling subject to change,
6Warren T. Gray, "Title Insurance Co-.panies," Examination of
Tr-'tr-"? C'---nit- (New York State Insurance Department, 1954), IV,
- 26 -
adding a new element of confusion to the public records. (6) Govern-
mental functions were widened. The public interests in land were
augmented from the right to tax and condemn to the right to regulate
the uses to which land may be put in order to secure the greatest
advantages to society. Zoning ordinances, building rest--ictions, and
fire prevention regulations are examples of multiplying public interests.
(7) The judicial decision in an important title case, Watson v. Muir-
head (Philadelphia, 1868), held a conveyancer not responsible for a
loss suffered from a defective title which had been searched by him
and submitted to an attorney who approved it. This case brought forcibly
to the attention of the public the inherent weakness of the then exist-
ing method of assuring titles because of the limited liability of
abstracters and lawyers for their errors. This case has been credited
with being "the greatest single force in changing the whole aspect of
Limitations Upon Abstracters' Liability
Abstracters, being human, make errors, but have been held by
the courts to be not legally liable for every mistake or omission
resulting in a loss to a purchaser of their services. The abstracter's
liability is based upon the obligation which he assumes of performing a
search with reasonable care and skill. Therefore he would probably not
be held liable for an honest error of judgment, or for mistakes honestly
mads in dealing with abstruse and perplexing situations that require
7Gage, op. cit., p. 80.
- 27 -
more than an average dcgre-e of care and sk-ll. In addition, courts
generally hold that there must be _-ivitj of contract before there
can be a recovery a linst an abstracter. EBcucse the vendor of land
usually contracts for and furnishes the abstract, but the buyer is
usually the one injured by a defective title, there is seldom any legal
responsibility of the abstracter to the party injured by his mistake
Lawyers' Liability for Their Errors
A lawyer's liability uniar a title opinion rendered by him is
limited to losses arising ft-om failure to exercise a reasonable dei.e
of care and professional skill. If the opinion is given in good faith,
a title examiner cannot be held for damng.es if -t proves to be erroneous
either as to the law or as to its application to the particular facts
involved.9 Lawyerrs, as well as abstracters, are liable in tort for
their negligence, "but it is difficult to secure a judgment against a
lawyer for negligence in examination of a title."10
Other Limitations on Recovery of Dc.raes
There are several other factors which severely limit the
possibilities of recovering for damages Ezffered from a defective
F-rt LcXillop, "Title Insurance," University of Florida L
PRview, VIII (Winter, 1955), 453.
91bid., p. 455.
10ohnstone, op. cit., p. 493.
- 28 -
title, even assuming that negligence on the part of the abstracter
or title examiner may be proved. The first obstacle is that the
necessity of bringing a legal action is, in itself, enough to deter
some injured parties. In addition, a favorable judgment cannot be
satisfied unless the abstracter or title examiner has sufficient
financial resources. All title examiners and many abstracters are
individuals who characteristically have great mobility and but limited
life. Consequently, they may not be available when a loss is discovered.
Finally, statutes of limitation begin to run for abstracters from the
date a mistake was made, and for title examiners from the time the
opinion was rendered, rather than from the time of discovery of the
error. Thus recovery action may be barred by statutes of limitation.1
In fairness it should be noted that abst-racters often are covered
by liability insurance, and some states require that they be bonded
against the risk of loss to others from their negligence. Many abstracters
are incorporated and/or have adequate financial capacity to meet claims;
and many abstracters voluntarily pay fcr losses due to their negligence
rather than incur the expense and adverse publicity of a law suit.12
However, the conclusion seems clear that an incorporated title insurance
company, which cannot deny its liability for insured losses under its
indemnity contract, will also be no-e able financially to pay claims,
and it, or a successor insurer, will be in existence when the losses
11McKillop, op. cit., p. 454.
2Johnstone, op. cit., p. 499.
- 29 -
There is a class of defects to which land titles are subject,
and against which cnly title insurance ir effective in providing pro-
tection. These are the non-record or hidden defects. A title may be
perfect "of record" and yet fail because of a defect which it is wholly
beyond the capacity of an abstracter or title examiner to detect. This
class of hidden defects includes: forged or fraudulently executed
instruments; false impersonations; incorrect identity of persons; want
of legal delivery--instruments im-roperly cr prematurely delivered;
copying and recording errors; wills void as to after-born child or
pretermitted (overlooked) heirs; decrees and judgments void for want
of jurisdiction; instruments executed by minors, insane or other
persons without capacity; secret marriages o- deed incorrectly stating
that the grantor is unmarried; unheralded divorces; unknown heirs;
invalidity of liens by reason of violation of uury laws; and any other
matter or fact not disclosed by the public records which in law or
equity would render void or invalid any transfer of title, proceeding
or encumbrance in the chain of record title.13
Although the probability of a loss cca-rzir- as a result of
these hidden defects is admittedly very slic-it in any given chain of
title, and the overall incidence of such losses is very low, such
losses occasionally do occur; when they do the loss ray be lerge or
total to the interest holder of record.
13William Gill, Sr., "Land Title CoTurs," Title :;ews (July,
- 30 -
The Title Insurance Contract
There are two general types of title insurance policies
issued: those intended for the protection of the purchaser or
owner of real property; and those designed for the protection of
the mortgage or lender of money on real estate security. These two
types of policies are usually termed, respectively, the owner's form
and the mortgagee's or loan form. The owner's forn, or an adaptation
of it, is also used to insure leasehold interests.
It is possible to generalize about the form and provisions of
title insurance policies, although the policy forms in use have not
been completely standardized, and there are significant differences
in coverage, particularly between the owner's and nortgagee's forms,
which must be noted.
Title insurance policies consist of four sections. These are:
(1) the insuring or indemnity agreement; (2) the schedule giving the
subject matter of the contract, teri..ed "Schedule A"; (3) the schedule
of exceptions--listing items not insured against, called "Schedule B";
and (4) a Conditions and Stipulations section, including some addition-
al exclusions from coverage, and the general mechanics of administration
of the contract.
The discussion ihich follows relates to the American Title
Association Ownucr's Policy--Standard Form A,--1960, and the American
Title Association Standard Loan Policy--Revised Coverage--19O0.
- 31 -
The Insuring A;rem:ent
The insuring agreement of this standard o'=zr's policy, in wiae
use by members of the A:erican Title .scciation; reads as follows:
Blare Title Insurance Comlarn.y, bla_ corporation, herein
called the Ccnpany, for a valuable consideration
i2REBY IrTSS ___Esg_______
hereinafter called the Insured, the heirs, devises, personal
representatives of such Insured, or, if a corporation, its
successors by dissolution, raeresr or consolidation, against
loss or dar.are not exceeding Dlollars,
together with costs, attorneys' fees and expanres which the
Company' may become obligated co p y as provided in the Co:-
ditions ar Stipulations hereof, -hich the Insured shall sus-
tain by reason of:
any defects in or lien cr encti.brnee on the title
to the estate or interest covered hereby in the land
described or referred to in Schedule A, existing at
the date hereof, not shown or referred to in Schedule
B or excluded from coverage in Schedule B or in the
Conditions and Stipulations;
all subject, however, to the Conditions and Stipulations
hereto annexed, which Conditions ana Stipulations together
wrih Schedules A and B, are hereby .ade a part of this
policy; all as of the day of 19 ,
the effective date of this policy.
It is noteworthy that no fixed term of coverage is stated.
The title insurance coemany rc-ains liabLe to indemnify an insured for
any loss, up to the face count of the policy, and for the cost of
litigation to sustain the ti-cle as inrued, for the indeterminate
period during which the insured can suffer any loss fero the risks
covered in the policy.
It is also worthy of note that the policy covers the "Insure,
the heirs, devisees, personal repreocnr-atives of such Insured, or, if
- 32 -
a corporation, its successors by dissolution, merger or consolidation."
Coverage ceases when title passes out of the hands of the insured, his
heirs, or devisees, except that an insured grantor rer.min covered for
his continue liability to a grantee for title covenants.14
It should be noted that Standard Form A does not insure rtrket-
ability. The American Title Association Owner's Policy--Standard Form
3--1960, differs only in the respect that i- does insure marketability.
Members of the American Title Association have been unable to reach
agrec-ment on insuring marketability in owner's policies. In some juris-
dictions, insurers do not hesitate to insure marketability, but in
others they decline to do so. The principal reason is the vagueness
of the concept of marketability and the varying judicial meanings
given to it by different courts. Mortgagee policies do insure against
unmarketability of title.
Here are found a statements of the interest or estate which is
being insured, the owner of that estate, and a legal description of
the property or reference to the description as contained in a specific
This section contains a number of more or less standard ex-
ceptions to coverage, varying with regional differences in custom.
Following a list o0' standard exceptions print-d as part of the policy
there is space for typing in the specific exceptions applicable to the
14Jomnstone, op. cit., p. 497.
- 33 -
estate or interest covered by the policy. 'he examples of standard
exceptions given here are taken from the policy of a Florida title
1. The lin of ell taxes beyond (a certain year).
2. I:echanics' and materir.len'3 liens of which no notice
appears of record.
3. t.ny encroachments, easements, measurements, area, content,
party walls or other facts which a correct survey of the tremaies would
4. Rights or claims of parties in possession not sho'n of
5. Roads, ways, strzeam' or easemsents; if any, not shove of
record, riaz'ian rights and the title to any fieled-in lands.
(With the a>ersem-nt of the company cny of these standard
exceptions may be deleted by a statement to that effect)
Specific exceptions added to this section will include all
liens and defects affecting the title found by the title examiner and
not remedied by corrective action.
The exceptic- listed are aeen to be significant reductions
of coverage, the imrrp.t of which the insu ed should be avare. It is
left to an insured owzmr to uroZect himself eSiaiat defects which an
accurate survey would disclose, and against rights of parties in pos-
session or visible easements which a thorough inspection of the premises
wo-ld disclose. Although excepted in oi.e.r's policies these hazards
aie normally covered in rortgasce's policies.
Condition 1 ::1 '
Only a few salient fest'ures of thiU section will be discussed.
- 34 -
Port 2, E:clusions from coverage of the policy.--contains im-
portant additional items which are not insured against. The Standard
Form A does not insure marketability, therefore loss by reason of
refuLal of any person to purchase, lease or lend money on the estate
or interest is not covered under this policy. Excluded under both the
A and B Forms of owner's policy are losses by reason of any law, ordinance
or governmental regulation restricting the use of the land, or regulat-
ing the type of structure erected on it, as well as goverrnental rights
of police power or exercise of eminent domain. Any defects knovm to
the insured but not disclosed in the application for insurance are ex-
cluded from coverage, as vell as sny defects created, assumed or agreed
to by him. Coverage under a title insurance policy is, of course,
limited to losses which arise from defects existing prior to the date
of the policy.
Part 3, Defense and prosecution of actions.--states that the
company "at its own cost and without undue delay, shall provide for
the defense of the Insured in all liti-ation consisting of actions or
proceedings comi.enced against -he Inured, which litigation is founded
upon a defect, lien or encucforace insured against by this policy, and
rr-y pursue such litigation to finil determination in the court of last
The responsibility which the insuring company asseuns of paying
the costs, expenses and attorney's fees incurred in defending suits
against the title, is an important feature of a policy of title insurance.
This protection is in addition to the stated liability of the face value
- 35 -
of the policyy and it covers the defense of unsucces.sful attacks upon
the title, or those of no marit c w~:all a- those based up;on a valid
Other parts of the Condition;s nd. Stipilations section of `the
policy spell out the r.mchnics of administration, e. g., the recuireaent
of notification of the ccmrany by the insu-ed of a claim, the cor-pany's
option to settle clair..s, and a subrogation clause under which the insured.
transfers to the insurer all rights and reriedies asginst third parties
ho are responsible for a loss paid the insured by the insurer.
Several items, ty-ps of rishs or hazards, have been roted as
included in the broader coverage afforded by loan policies, although
frequently or generally excepted from covercGe in owner's policies.
These include loss by reason of u-ar-ketability; defects which an
Accurate survey and physical inspection of the premises vould disclos-;
mitericlnen's and mechanics' licns. Ihis br'oar coverage reflects the
superior bargaining po;-er of the large nctioral lenders undar mortgage
loans, together with their insistence upon policies providinj bread,
standardized protective fcaturns,
T.;:o additional futures of the ror.tgagee's policy which _re
noz applicable to owners' policies are Cis=csead beIlor:
The "Ins--'d unler .a mo-'tS-e 'e policy inclures all su'sequart
owr-rs of the interest covered by the policy "aed each successor in
interest in OaOrshipo tLhreof, and also any such o;er who easnqires
the estate referred to in this ro 'cy by 'oralosure, trustees' sle
- 36 -
or othur legal manner in satisf-ection cf said iadbtedness, and any
federal agency or instrumentality which is an insurer or guarantor
under an insurance contract or guaranty insuring or guaranteeirg such
indebtedness," whether named as an Insured herein or not. (This latter
provision is made to protect the Federal Housing Administration and the
In essence, a mortgagee's policy is assignable to a purchaser
of the interest insured, but owner's policies do not cover grantees
of the insured.'5
In the event of foreclosure and/or purchase of the property
securing a loan by the holder of a mortgage, the mortgagee's policy
of title insurance is automatically converted into an owner's policy
to the extent of the interest represented by the outstanding indebted-
rnss. This applies to a federal agency, e. g., F1A or VA, which acquires
each new owner of property rnu-t take out a new title policy
if he wishes title insurance protection. Title insurance companies
justify this by pointing out that, to be cf value, an owner's policy
need to be brought up -co date. They al-o contend that if assign-
rent were generally practiced, a purclchaer night be mislead into
believing that the title was insured, when there -!y have been a
complete failure of title subsequent to the date oi the policy.
It r..ight also be noted that the existence of a r.ortcgce's
policy on property gives no protection to -th omner of the pro-erty.
In fact, a-der the subrogation agrereent of the mortgage's policy,
the insurer L.ay require reir.burseenot 'rom the o nar (mortgagor)
for a loss naid to the mortgagee.
Copies of standard title insurance contracts can bt
obtained from The .%Aerican Land Title Associ-tion, Washingtnon, D. C.,
or any of the Association's meter conaranics or agaS- s of 2... ar
- 37 -
The l1 'r institutior0n lcade-:s, particuarly life i--r-re
cc..C_-niies, e a had a ma=jcr i.r:p-at on the devlc r--nt and sprealiCr
use of title insurance. The lar e life insurance cc.panies hold
mortgages on lands located in all parts cf th;e United States. t:'-y
do no- originate all of their mortgage Icans, but buy extensively
fro-m mortge ba'-;s ,ad brokers. Title iz.scrance aadis trcatly to the
marketability of rortgagss. Whereas mortgages were once considered
to be localizec, no'-liquid in'.-stments, %;hean suported by a policy
of title insu',nce they become highly marketable investments i-ith a
Title insurance provides the most standardized form of title
protection, and life insurance companies us-ally insist on it as a
condition of approving a mortgas, except in areas where title insur-
ance is still uncoir-on. "It woutl be difficult to overstate th-
importnce of title insurance in t-e ..ortgage lendin operation cf
the Life Insurance Co:panies."17 Co -ersely, it would be difficult
to overstate the importance of the lar1 a national lenders to the
deveicpmcnt of title insurza.ce.
Other reasons why the lare lenders prefer titei insurance are:
its ca-e of ho::.3 office exam.ination--in con~ rst to a bully abstr-a-z
of title, thae road cover-ae wi ch crtae's policies now ffor
thie s ,lon of claim negotiation and liti-C-tio by tha title i
liCarol Ceesey, -e t _oe Ex t c' Title
Insurance," :tle Iews (lovebIer, 1 15.
and the financial ability of the title insurers to p y clai.s.18 A
title policy also provides evidence of complia-ce with the limitations
sc-m states put vpon the investment practices of life insurance com-
panies, for example, the restriction that mortgage loans be limited
to first liens on otherwise unencumbered real estate.19
Justification for Broader Coverage of Loan Policies
As leading customers of title insurance companies, the life
insurance companies have been able to insist upon policies which pro-
vide broad, st-adardized coverage. Broader coverage results in a
greater cost to the title insurance company because of the more exten-
sive examination required and the higher incidence of losses. Yet the
price per thousand dollars of coverage is less for a mortgagee's policy
than for an owner's policy.
There are several factors, in addition to competitive ones,
which justify a lower charge for mortgagee's policies in spite of the
broader coverage afforded. (1) If the mortgage is repaid under its
terms, as most of them ultimately are, the coverage of the aortgagee's
policy ceases and there is no possibility of a claim under it. Thus
the mortgagor stands between the insurer and insured. If he performs
his pay.eant obligations there will be no cla-ms unler the policy,
regardless of the soundness of the title. (2) As the mortgage p"a ;..nts
are trade the nortgagce's interest, and hence the liability under the
8- chnstone, op. cit., p. 503.
19bid., p. 503.
- 39 -
policy, is rsedced (3) .-ere is a salve v.lue in the ecqity between
the crountt of the mortgage debt and the actual value of the property.20
--ract o" U-nit-d States G"overma-n.t cn Titlu Irncurce
The Fe deral National MortS.e Asso-sition prefers title ins-orance
an3, i-,sists cn it to about the sar.:. cwxsn as Co the laoge corporats
leandrs, having fo'ud it to be an e-aential element in helping to
determine the ready a. rkcetability of the rntsages purchszd.21
The scosnday n~aket for Federal HoEi ing Adiministration lo-ns
is said to be strictly a title insurance rn-lrkt. .:- :.:-: in govern-
-rnt g:-ranted mort-tages, incluiin F. :. A., regar- the require-
centr of evidence of soca tit-e as the Achilles heel of the F. H. A.
,ni V. A. .ortgages because the guarantee i- conditioned upon satis-
fct-cy evidence of a valid title, ami, if the holder of the mortgage
c-oiot present satisfactory evidence of valid title the uzderlyfing
guarcarte rry be r i.o-crhless."22 At the time- the loan is closed, 'the
rede-al n:: r AdMciiLtrclio! dCacs not as a ttr of couare a pass
upon the title b-ut de-ras e.tizly upon the -crt'agee's detra=i-ation
that it has title that will bca accepabolc to the 'A in the evenT; the
1~.. is tendered a- soC-,. ia e c'Lc in e::ch-c_3 for debentures.t
2CcKillcp, op. cit., p. 460.
"21,~Artr Itotn of Tfit> insurance to :,21. "
T.tle ,: (Sc- -ber, 1563), 3.
IL A. ', Ji-le :r at f Co-OnrJive z 2n,
C: m or, ,.' r -aV-
2-t.or" . E c.. "itle _E:i of Vla _. s in
- 40 -
Thus, although they do not require title insura-nce as a condition
of insuring or guaranteeing mortgages, the Federal Housing .d-inistration
and the Veterans Administration, because of the circumstances discussed
above, have also giver great impetus to the growth in use of title
insurance in the field of mortgage lending.
Public Regulation of Title Insurance
Title insurance companies are subject to public regulation, as
are other insurers, because of the public interest in the security of
The public interest being ranifest, therefore, the method
which has been found best adapted to insure the protection
of this interest has been the e nactment of comprehensive
state statutes regulating the business of insurance, in-
cluding, of course, title insurance.24
The regulation of insurance historically has been centered at
the state level. For the supervision of insurance, state legislatures
customarily have created insurance departments within the executive
branch of government, with a commissioner or superintendent of insurance
More comprehensive state regulation was stimulated by the
South-Eastern Underwriters case, decided in 1944, in which the Supreme
Court of the United States held that an insurance company conducting
a substantial part of its business across state lines is engaged in
commercee among the several states" and is subject to regulation by
24Roberts, op. cit., p. 25.
- 41 -
Congress under the cojr ercs clause of the Constitution.25 This decision
reversed a series of previous decisions by the Court, beginr-ing wi.th
P. ul v. Virginia, decided in 1868, holding that the business cf insurance
was not commercee.6
Faced with a decision that undermined the system. of state regu-
lation, Congress passed the IcCarran Act, Public La- 15, in 1945. This
act declared a congressional policy in favor of continued state regu-
lation of insurance and provided a noratoriiu of abou; three years
during which time the Sherman, Clayton, Federal Trade Co.-ission anE
Robinson-Patcan Acts would not apply to the business of insurance.
After 1948, however, these acts would become applicable to "the extent
that such business is not regulated by state law."27 To forestall deBaer
Federal Government involvement, most states passed model insu-ancs codes
within the grace period allowed.
Title insurance has received far less attention than the majcr
forms of insurance, but it is adequately covered by the insurance codes
in most jurisdictions. Most state regulation of title insurance is
designed to reduce the likelihood of a company becoming insolvent.
The necessity to obtain a license from the state regulatory agency in
order to conduct business within a state is the keystone of the regu-
latory system. In order to qualify for a license, both do:metic an-
25James B. Donovan, "Public Regulation of Title Insurance,"
Title News (December, 1953), 74-77.
2Roberts, op. cit., p. 26.
27roid., p. 31.
- 42 -
foreign title insurance companies must meet and maintain the raeuirer.ents
of the insurance code.
These requirements will be discussed under the headings of:
incorporation, minimum capital and paid-in surplus, deposit of securi-
ties, liability reserves, scope cf business, maximum underwriting risk,
annual reports, examinations, rate regulation, and investment linmtations.
There are many variations in regulations among the uore than 50 j-uris-
dictions, but it is possible to generalize regarding the usual pro-
It is almost universally required that a title insurance ccprany
be incorporated. The corporate form is appropriate in view of the large
capital requirements and the need for extended or permanent life.
Minimum capital and paid-in surplus
State statutes normally prescribe a minimum capital requirement
for incorporation as a title insurer. The amounts vary but cost require-
ments are in the range of $100,000 to $250,000 of paid-up capital, with
frequently an additional 50 per cent, i. e., $50,C000 to $125,C00, of
contributed or paid-in surplus. The minimum capital must not only be
paid in when the company is licensed, it must constantly be maintained.
If it is impaired, the insurance commissioner is authorized to institute
liquidation or rehabilitation proceedinEs.28 The paid-in surplus
usually need not be maintained but is intended as assurance that the
capital will not be impaired during the early years of a company's
existence when expenses may be ex:pectcd to exceed inco-e.
28 id., p. 156.
- 43 -
Deposit of securities
A deposit of securities with the insurance commissincnr, or
other designated public official, is usually required as a coniitioL
of receiving a license to do business within a state. The amo-n=s vary
but $50,000 to $100,000 are most frequently required. Evidence of a.
equal deposit in the insurer's state of domicile often is accepted in
satisfaction of all or part of the requirement.29 The securities
eligible for deposit are normally of the highest quality, such as
United States Government or state or municipal bonds.
Most title insurance codes contain liability reserve require-
ments. A percentage of risk premiums, varying from 3 to 10 per cent,
is customarily required to be set aside as an unearned premium reserve
or a reinsurance reserve. Typically the sums set aside rmy be taken
back into income after the lapse of ten, or more frequently twrety,
years. Usually, the reserve must be maintained until recovered in-;o
income and title losses incurred are charged against current operating
income rather than the premiu.- reserve.
Reserves for unpaid losses, expenses and taxes are loss
frequently specifically mentioned in title insurance codes, but would
be expected in accordance with sound accounting practice.
Scone of business
In the past there has been a te-nency to combine the title
insurance business with some other operation such as bar.in, fiduciary
291bid., p. 119.
- 44 -
or trust, or mortgage guaranteeing. The present tendency of state
regulation is to encourage a separate corporate entity for title
insurance. Specifically, the guaranteeing by title insurance companies
of mortgage parents is prohibited in a number of states because of the
many failures of mortgage guaranteeing companies which occurred during
the depression of the 1930's.
Maximum underwriting risk
Title insurers are often restricted in the maximum amount of
risk they can assume under any one policy risk, without reinsuring
the excess. A typical provision would restrict the retained risk to
10 per cent of combined capital and surplus.30 The same limitations
usually apply to the assumption of reinsurance as apply to direct
The classes of securities or property in which title insurance
companies are authorized to invest are usually designated in accordance
with the source of funds to be employed.
Minimum capital is typically restricted to investment in:
(1) a title plant up to a specified amount or percentage of capital,
(2) bonds of the U. S. Government or of a state or local government,
(3) corporate bonds may be authorized if they meet an inco. test,
(4) mortgage loans may be made not to e::ceed two-thirds of the value
of the real property securing the loan, (5) savings and loan shares
insured by the federall Savings and Loan Insurance Corporation,
30Ibid., p. 110.
- 45 -
(6) real estate to the extent required for cova.nicnt transaction
of business or acquired in satisfaction of a loan (frequently a time
limit is set beyond which the real estate acquired in satisfaction of
a loan cannot be retained without approval cf the insurance co::uiscioe-r).
Statutory premium reserves may be invested in the same classes
as capital, except that investment in title plant and real estate vculd
not be authorized.
Surplus may be invested in any of the classes authorized f2r
capital plus common and preferred stocks. A few states set percent e
limitations on equities, but, in general, the investment limitations
on title insurance companies are not unduly restrictive.
Several states, including New York, restrict authorization of
state and local bonds to those of the home state, its counties and
municipalities. This is evidently more to enhance the marketability
of home bonds than to insure quality of investment holdings.
New York also restricts common st-ock holdings to 50 per cent
of policyholder's surplus (net worth) or 25 per cent of admitted accets,
rhichovcr is lower. This rather severe limitation is in contrast to
the wide latitude afforded title insurance cc:-panics in most sttats.
Reports and examinations
The insurance co.rissioner requires filing of prehensive
annual statements and conducts periodic exaii.nations of title insuance
coamanies. The examinations are usually at two or three-'cr i-terval
and are ieaounatiy accomplished by the cooperative efforts of e rs
from t.- insurance departments of several states in which the cc:-:7"v
- 46 -
Control over rates
Most states have given the insurance commissioner authority
to review the rate schedules filed by title insurance companies anr
determine if they meet the requirements of applicable statutes and
regulations. Unless the filing is disapproved by the cor..issioner
within a prescribed period of time, it becomes effective and is der.eed
to comply with the law. Various criteria are set by statute for establish-
ing the propriety of rates. These usually include: (1) past and pros-
pective loss experience, (2) past and prospective expenses, (3) per-
centage to be allocated to reserves, and (4.) a reasonable margin for
profit.31 Title insurance premium rates are required to be adequate,
but not excessive or unfairly discriminatory.
Title insurance companies have been subjected to less stringent
control over rates than have, for example, fire and casualty underwriters.
An important factor contributing to the minimum regulatory attention
given the title insurance business is sinqmly its small size within the
giant insurance industry. Insurance commissioners' limited staffs have
been preoccupied with supervision of the r jor lines of insurance such
as life, accident and health, fire and casualty underwriting.
Another important factor is that title insurance rec-liut rtes
have remained remarkably stable over the last -chirty years. It is
probable that more severe r.te control w uld have been ir.-csi on title
insurers if they had found it necessary r:-iodically to petition for
higher rates. Insurance commissioners nay have rega-ded roquasts for
31oid., p. 255.
higher rates ac indicating a need for more c:rten-ive roeJltictL,
wheroas the continuation of existing rates r:ovoedd no rcaction.
How has it been possible for title in2su.anXc premiu..: ratc. to
retain constant during a >period of ma.Cke price inflation? The r;ost
important reason is that the rates are tica directly to property vxitac.
Title insurance premium. rates are uot-ed as so m.uch per !1,0C0 of the
face amount of the policy. As propety values have incrae-acc, title
policies have carried larger fice values with correspondinrly higher
premiums. In other words, pre.i-m incc.3 has expnr.oed at about th
same rate and to about the same extent that property values have i_-
creascd. The larger prenium income from large~ r policy amounts has
tended approximately to offset the rising costs of producing abstr-cts
and settling claims. In this connectici, it night be noted that the
cost of prcducing an abstract for a property value at ,20,CC0 might
be very little, if any, greater than the cost of prcduicin: an ostract
for a $4,000 property. Thus, an upgrading in average policy arounts
has a favorable affect on average pro"iuction costs.
Title insurance has been gaining wider acceptance and u.- e,
-paticularly because nortgaeI lender-s friqua..-ly insist upon it as a
condition of loaning money on real estate secauri-y. In aviation to
the increase in averao- policy amount iaich h os cccrred with risire
_ .-ocrty values, the number of title in-' nce polic-es i s ei pier
year has gron rapidly since World War II, 1 ith cov-respo-dii bcn-fits
to unit cosns. The volume of title i srance busince is closely
- 48 -
related to the number of real estate transactions, and the period
since World War II has been one of high real estate activity.
Unit costs have also benefited from cost reduction programs
involving introduction of labor and time-saving techniques. Under
the leadership of the larger companies, improvements have been made
in methods of data reproduction and storage; the resulting economies'
have helped to offset higher wages and other production costs.
Market conditions within the industry have been another in-
fluence in keeping title insurance premium rates constant in the
absence of strict public control. The title insurance business has
both competitive and monopolistic features.
There is relative freedom of entry. The capital requirements
for new incorporations are modest and existing title insurance companies
can become licensed in additional jurisdictions by meeting the minimum
capital and other statutory requirements.32 There has been a tendency
for more companies to cross state lines and compete aggressively for
business in favorable areas. However, the number of sellers remains
very limited; in most areas title insurance.is offered by from two or
three to not more than twenty companies.
The limited number of sellers has important implications for
rate making. Under these conditions, there has been a tendency for
price competition to be avoided. One of a limited number of sellers
reasons that a price reduction initiated by him would be matched by
32There are exceptions to the general freedom. of entry. For
example, the requirement for a deposit of $500,000 to do business in
Cook County, Illinois.
his competitors, and with a price-inelastic demrand such ac probably
exists for title insurance, total industry receipts wcCId be !_-o
after a Goneral rate reduction. Furt'her:.ore, the filing cf a rate
reduction by one eoc=any night cause an insurance cc missioezr to
suspect that the title insurance rate structure needed investigation
or imposition of additional controls.
Unilateral rate increases are also dangerous because exizstirn
con.ptitors ray not follow the increase or new competitors cay be en-
couraged to enter the market. Although the industry dCrand for tile
insurance is probably price-inelastic, the dea:and which an iniividuUl
company faces is likely to be highly price-elastic. The cc.r-any
charging a higher price would lose a great deal of its business.
Insurers are protected from destructive rate wars by insurance
department requirements that filed rates be adhered to unless reqiocted
deviations are approved by the insur.ace coi _,icsioner. Sc:-e covert
price ccr.-etition may be indirectly cnagSed in by title insurance
coapanics through allowance of more -ererous co:=.-isions on busizes-
generated by certain agents o- other i-term.ediar.ies. This practice
would be in violation of statutory prohibition against discri.inatica
in rate making. It may also invite c.e csvere r-te rc ulatic- in
jurisdictions here controls have prcviou'sly een li htly aj lied.3
33An industry source hts advised hc wZiter tL-t "rate cu ti.
in certain areas of Florida has in effect occur -i. The raT cutti
seems to take the form of quantity diccounto or higher com.;iions or
both, the benefits of which may or ry not be pc- ca on to tha Ulti-
rate purcha r by the agent or inter~mcdiary. ahis hc: b_-n cited a
one reason for the current considri-ation of stricter reg-ulation ci
the title insurance industry in -hat State.
- 49 -
- 50 -
With price cutting largely ruled out as a respcct.able -cu.ns
of competing, non-price factors have ecei.vcd greater attention.
Development of a large netwTork of agents, authorized to ropreccnt tLe
title insurance company and issue policies in the company's name, has
been an important means of non-price competition. The agents are
usually either "approved:' attorneys who specialize in real estate
practice or local abstract companies. Maintenance of working relation-
ships with mortgage-lending institutions has also been important for
title insurance companies. Advertising and other promotional activi-
ties seem to have been effective in irnreasing the demand for title
Custom, convention, inertia and the fear of provoking more
severe rate controls by regulatory agencies have been factors in-
hibiting rate changes. The relative importance of each of these can
only be surmised. In any event, a balance of forces has existed,
and title insurance premium rates opr thousand dollars of coverage
have remained substantially unchanged since the 1930's.
DESCEIPT:ION Of' Tz- InDU3wTE; JI 2L
The industry sample selected for this sti.y consists of thirty
companies vhich together are responsible for a edormian t share of total
title insurance written in the eastern Uniced States. T:2h tZhirty
companies have been arrayed in decreasing order of admitted cscets
reported as of December 31, 1963, and futher- subdivided into t.--cc
groups of ten companies each. The ten la-gest cop -cnis are desisc atcd
Group A, the ten middle companies C-rou B, ard the ten smallest com-
panies Grop. C. While this division is arbitrcry, it serves a usful
purpose, and the companies which fail into the three ecuis do have
distinguishing characteristics in conr.mn with their respective C'cuo
Each of the ten largest ar7-e inter-stace or national coCn.iie,
defined as doing business in five or -ore states. In fact, the ten
companies of Group A conprise c 100 2pe cent sample of the large
companies in the United States v'hich operate on a rational basis.
Each of these companies have admitted assets in excess of 27,CCOCOC,
which makes each of then a r.:ajc factor in the title insurance ini-ctry.
Half of the companies comj-2iing GC-ou 3 ccn also 1s eallad
national, as defined for our purpose, but there is a significant c-p
in size between the small; of the Group A companies and the larJst
- 51 -
- 52 -
of the Group 3 companies. The Group B ccmp..nica have admitted azcts
of more than $2,000,000 but less than ~5,C30,;00 as of the end of 4-53.
The cther half of the Groul B comp-anies are local c- non-national, but
have reached "middle-size" anong title insurance co_- -ies.
The Group C companies, having ad.:.itted assets of less than
$2,CCO,000 are characteristically local in their scope of c..rations.
All excepting one confine themselves to ona state or to a several state
contiguous region, such as Washington, D. C., ;:ryland and Virginia.
The distinction between these th-ce groups cannot be too sharply
dra'n, but we shall see that the groups Co produce significantly dif-
ferant results in several respects.
Table 1 lists the companies in the sample, together with their
state of domicile. A cede number is assigned to each co-mpmy by this
list and all future identificc-ion w il be by this code na ber.
The sample data to be use. in the study were obtained from the
annual statements filed with state insurance depart..erts. .Th insurance
dorartcants of the states of :ew York, Tew Jersey, Pennsylvani'a, Dis-
trict of Colu.-bia, Ceorgia nd l ria .rre visited and abstract copies
..-de of annual statements for the years 1959 though 1963. Since about
half of the companies operate in nine or or-e s',ates, the sarole -at
provide coverage extending far beyond th i.taces viited or the states
of domicile. Sone title insurance ivas ..--itten in every s-ate, ueYrto
Rico and the Virgin Islands by one or more o2 the sample cc=-anies.
TITLE CCIJ. X;! S I S.-.
Code N uTmr Name of Company He- S-te
G---' .^.. Admitted casets of r.c-e thcan
1. Lawyers Title Insirance Corpor tioV.
2. Chic^, o Title Insu-ance Comany :o.
3. CoI.:on:ealch1 Lrad Title InsLi ace Co.pany PC.
4. The Title Guararnte CorTany -. '.
5. A-erican Title -nsurance Comr,-y 5-.
6. Title Insr-ance Cor e-ny of .:insota ; .
7. InTer-County Ti'tle Guaranty & orta Co. :. Y.
8. Kansas City Title Insurancc Ceo:;.-ny o.
9. Title Insurance Ccrm.ny of St. Louis
10. Louisville Title Insura~ rce Cca:-ray : y.
GC:ou'o B. ACroitted assat rmore thr.
.,27 00000 but less than $5,OC0,CCO
11. The Title Gu-xa-tee Com. ny -..
12. Security Title ad. Gu-aianty Cc -rny i Y.
13. Realty Title Inlcrancc CcaLy,,; Inc. D. C.
14. Chelsea Title ',d Gur.nity Co ma-y :. J.
15. 3Borw Title Insuranco coanay Pa.
16. Niw Jersey Raally Title Ir sa--cc Co. J.
17. Lau-ars' Title ur a :y 1?,d La.
18. City Title ITu'-nc .
19. District Title Ir.surnce C.
20. .ast Jersey Title a-i Ct.-.LTy Ccrany .T. J.
.- a.yite sets !s j. *
21. Laiers-Clino- Tile Isurn Coay J.
22. The Title I m'iane Cor-'ra ic- of
23. nationall Title Ins2r-.-:e Co. ,.y 71o.
24. ;No-'ca Abstract cd- Tiile C y Y.
25. 1eal Estate Titi I c Cc y D. C.
26. Colu-bia T1itle insu-i nce y D. C.
27. Garden State citle Irnsurarc C% y 1. J.
28. Subr-bi-an Title _.,- -nvest.rb-t Cc : y 7-.
29. :utropolitar- Title Gu -rrty Comp. -
30. Southeastcrn Guar-nt2ed Tit a lizs- -cu Co. C .
- 53 -
- 54 -
Source of Data
In preparation for this study of the title insurace iu.i~cry,
it was evident that obtaining the necessary oprerting and fi:-nci-.l
statistics would not be easy. The annu l statements filed with state
insurance departments by each company licensed to do business within
che state contain the necessary data, but these stater.ents repose in
the files of the respective state insurance departments. Uo central
collection of these statements o2 the data whichh they contain is avail-
able, and no one state has a sufficiently large number of title insur-
ance companies doing business within the state to provide a gooe sample
of the industry.
Since the data from the annual statements are not ruelished or
compiled, it was necessary to visit a nreuer of state insurance dz- rt-
ments "nd abstract the operatir- and financial statistics from the
annual statements on file. :ortunatly for the researcher, tLe for t
for annual statements of title insurance ccmiranies has been star-drdi- d
by the ational- A.jscciation of Insurance Cc.:issioner. Concaquan'ly,
annual statements on file for all companies in the fifty states and the
District of Colufbia are accomplished cn the s-me "blank" consisti-s
of a 28-page booklet. Rather extensive alterations were nade to the
format in 19E0, which nake direc- eo:mparisons with pro-1oO dat-
difficult in so:m cases. However, a great wealth of information cn
title insurance company operations and financial condition is avail-
able from this source.
- 55 -
A factor limiting the availability of data is that generally
the statements are retained by insurance departments for crly a few
years and then destroyed. For example, Hew Jersey retains annual
statements of domestic companies for ten years, and companies domiciled
in other states for three years. Several states, including Korth Caro-
lina, Georgia, Virginia, and Maryland retain the statements of foreign
companies for only five years. Ohio retains all statements for only
two years. Although New York and Pennsylvania retain the statements
as permanent records, and several other states retain their domestic
companies' statements permanently, the limited retention period in
most states made it necessary to confine the collection of data to a
Selection cf r t-c 4T rrlc C-r-lr-.
The number of title insurance companies licensed in the dif-
ferent jurisdictions varies. For example, Virginia has 15, New Jersey
20, New York 11, Pennsylvania 15, Georgia 14, and the District of
Columbia 16. There are many duplications among these companies since
some companies are licensed in each of these jurisdictions as well as
in many others. Thus the data for many companies could be obtained
in a number of different places.
It was determined that a good cross section of the industry,
as it operates in the eastern United States, could be obtained by
visiting the insurance departments of I:ew Ycrk, New Jersey, Pennsylvania,
the District of Columbia, Georgia and Florida, and abstracting the
- 56 -
annual statements of selected companies in each location, for a total
of thirty companies. The sample provides a much broader coverage than
is apparent from the relationship cf 30 to 97, the latter number being
the total of companies licensed in the six jurisdictions. For example,
the sample contains 9 of the 11 companies licensed in Yew York, 17 of
20 licensed in New Jersey, 10 of 15 licensed in Pennsylvania, 15 of
19 licensed in Maryland, 15 of 16 in the District of Columbia, 13 of
15 in Virginia, 9 of 11 in North Carolina, 7 of 10 in South Carolina,
11 of 14 in Georgia and 14 of 21 in Florida. In addition, the com-
panies licensed in these jurisdictions but not included in the sample
were either very small or were operated in conjunction with a bank or
trust company, which would have complicated analysis of the title
insurance business if they had been included in the sample.
A further indication of the comprehensiveness of the sample
is obtained from these premium statistics: Of the total title insurance
premiums of $6,308,368 reported by New York State for 1962, $6,282,924,
or over 99 per cent were written by companies included in the sample.
Of total title insurance premiums of $5,647,923 reported by Pennsyl-
vania for 1962, $4,734,236, or about 84 per cent, were written by sample
companies. Of total premiums of $2,004,318 reported by Virginia for
1962, $1,918,239, or almost 96 per cent, were written by companies in
the sample. Of $3,153,209 in premiums reported by Ohio for 1962,
$2,784,465, or over 88 per cent, were attributable to the nnmple
companies. Of a total volume of $1,753,498 reported by Georgia for
1962, $1,560,294, or 89 per cent,were accounted for by the sample
- 57 -
companies.1 It might be noted that none of the sample comp-nies; Was
domiciled in the latter two states, and that Virginia was not one of
the states visited. The high coverage obtained is possible because
of the cross-licensing of so many companies.
The sample data in hand are believed to be very representative
of the title insurance industry, with the exception that no companies
domiciled in the western United States have beer. included. Title
insurance is used more extensively in the Pacific Coast states than
perhaps anywhere else in the United States, but the companies dcilciled
there have confined their operations to one cr several western states.
The subject of title insurance as practiced on the Pacific Coast would
be an interesting study in itself, and the findings might differ from
those of this study in some respects.
Although our sample data do not include Pacific Coast coverage,
they do represent a significant part of total industry business for the
entire United States. Johnstone estimated total title insurance prsmiua
volume for the United States in 1954 to be $100 million.2 Assuming a
doubling of volume by 1963, with premium volume of $51 million in that
year the sample companies would be accounting for about 25 per cens
of the total industry business.
The annual statement data for two companies in the sample are
pro form for the years prior to 1963. The Chicago Title Insurance
Company was formed in 1961 by Chicago Title and Trust Company. In
1Premium data from annu-1 reports by state insurance commissioners.
2Johnstone, op. cit., p. 492.
- 58 -
1962, Home Title Guaranty Company of New York was merged into Chicago
Title Insurance Company, therefore pro formn- statements have baen
constructed for Chicago Title Insurance Company for the year: prior
Similarly, American Title Insurance Company acquired Guaranteed
Title Company of Iew York in 1963. Therefore, pro form statements,
including the two companies, have been constructed for American Title
insurance Company for the years prior to 1963.
The sample includes the Lawyers' Title Guaranty Fund which
was organized by members of the Florida Bar in 1947. This title
insurer is organized as a business trust, which makes it unusual in
two respects. Most states require title insurance companies to be
incorporated, and, through 1963, no federal income taxes were being
paid on the earning of this successful enterprise.
To give an indication of the operating results and the financial
condition of the title insurance industry, an aggregate income state-
ment and an aggregate balance sheet are presented in Tables 2 and 3.
The income statement is for the year 1963, and the balance sheet is
as of December 31, 1963.
From the aggregate income statement, Table 2, it can be ceen
that the sample companies had premium volume of $51 million i, 1963
and total operating income of $91 million. About 51.9 per cent of
operating income is attributable to title insurance premium; 42.6
- 59 -
AGGREGATE INCO~T STATEIZIE FOR
THIRTY COMPANIES 21AR 1963
THOUSANDSS OF DOLLARS)
Direct Premiums Written $50,940
Reinsurance Assumed 138
Less Increases in Statutory
Premium Reserve 3,630
Premiums Earned $47,452
Search, Examination and
Abstract Fees 39,149
Trustee, Agency, Escrow and
Mortgage Service Fees 4,899
Total Operating Income $91,505
Losses and Loss Adjustment
Operating and Administrative
iTet Operating Income 13,372
Investment Income 3,871
Capital Gains Realized 226
Less Deductions from Income 685
Taxable Income 16,737
Federal Income Tax 7,253
Net Income $ 9,532
Source: Annual Statements.
- 60 -
per cent to title search, examination and abstract fees; and 5.3 per
cent to trustee, escrow, and mortgage servicing fees.
It may be noted that the title insurance business is character-
ized by very low loss ratios. The total of losses and loss adjustment
expense is 5.5 per cent of premiums earned, only 2.9 per cent of total
operating income, and only 15.5 per cent of taxable income.
The total of operating and administrative expenses is 82.5
per cent of operating income. Thus loss ratio and expense ratio to-
gether total 85.4 per cent, leaving an operating profit margin of 14.6
From Table 3 it can be seen that investment assets constitute
about 73 per cent of total assets. Tax-exempt state, local, and revenue
bonds are prominent, slightly exceeding the total of U. S. Government
bonds. Bond holdings total 40.4 per cent of total assets. Only 16.3
per cent of assets are invested in common stock. The rate of return
on investments is 3.48 per cent.3 Realized capital gains provided an
additional 20 basis points in 1963. The low return on investments
reflects the large holdings of tax-exempt and U. S. Government bonds.
Of course, the after-tax yield is benefited from the tax-free interest
The effective rate of income taxation is 43.2 Per cent. Tax-
exempt bond interest, the favorable taxation rates on intercorporate
dividends and realized long-term capital gains, and the lower corporate
3Investment return is computed using the average of investment
holdings as of December 31, 1962 and end 1963.
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AGGEGCATE BALAYNC S-EET FOR HIRTLY
COI'.AN 'IS AS 0 DECE-T3E 31, 1963
Operating Assets: Dollars Per Cent
Cash in Banx $T75s i ,L
Title Plant 11,657 7.1
Real Estate 6,801 4.0
Other 4,332 2.7
Total Operating Assets 44,536 23.9
Government Bonds 31,324 19.1
State and Local Bonds 34,594 20.8
Corporate Bonds 781 .5
Mortgage Loans 12,594 7.6
Collateral Loans 3,695 2.2
Savings & Loan Shares 7,987 5.0
Preferred Stocks 2,631 1.6
Common Stocks 26,999 16.3
Total Investments 121,105 73.1
TOTAL ASSETS 8165,641 100.0
LIABILTIES AID MET WORTH
Losses Payable $ 2,317 1
Expenses Payable 3,735 2.2
Taxes Payable 5,312 3.2
Premiums Received in Advance 1,299 .3
Hithholdings 1,155 .7
Other 1,88c 1.1
Borrowed Money 5,912 3.6
Statutory Premium Reserve 39 -' 2_.0
TOTAL LIABILITIES 61,370 37.0
Capital 30,134 18.2
Surplus 74,137 14.3
TOTAL IET WORTH $104,271 63.0
TOTAL LIABILITIES ATD :ET WORTH .165,641 100.0
- 62 -
tax rate on the first $25,000 of earnings, contribute to reduce the
tax rate below 50 per cent.
:.et after-tax profit is at the rate of 9.1 per cent on net
worth. This is a combination of the relatively high operating profit
rate and the relatively low investment yield.
Total liabilities are equal to 37.0 per cent of total assets;
while net worth accounts for 63.0 per cent.
The statutory premium reserve is equal to 78.0 per cent of the
premium volume for 1963, and is 15.3 times the losses incurred in 1963.
.et worth is over 200 per cent of premium vol-um.e. The increase in
statutory premium reserve in 1963 is equal to 139 per cent of losses.
In summary, after this perfunctory analysis, the title insurance
business appears to be characterized by low losses, high reserves relative
to losses, very satisfactory profits, large cushion of net worth--ec~!-l
to 170 per cent of total liabilities, and a conservative investment
In the chapters which follow, the financial and investment
aspects of title insurance will be investigated in some detail.
D3GRFE OF RISK I TITIE IS31ACE U7I-ER.ITII.3
In an investigation of che degree of risk inherent in title
insurance underwriting, it is appropriate to begin by examining the
loss ratios experienced by the title insurance industry.
Title insurance is an unusual form of insurance in that the
loss/premium ratios experienced tend to be very low in cc.sarison to
the ratios experienced by other types of insurers. The loss ratio
experienced by the title insurance industry is so low, in fict, that
it has caused some observers to question whether title insurance is
really insurance. Most of this doubt arises from confusion of terns
and from attempts to apply the familiar standards of fire and casualty
underwriting to title insurance, although they do not fit. whilee
title insurance loss ratios are normally low, they have usually been
computed in a manner which understated them.
The charge which a title insurance cor!,any arkes for a policy
of title insurance, although it r.y be tcrme d arn reported a.s a "ro.iu.
often includes the fee for producing an abstract of title and exa:.inin3
it for defects, as well as a premiund-m to cover the insurance rishz. Of
the two parts, the search and examination of the record titl- accc'i-s
for a larger portion of the total cost than does the inae.nity feaItue.
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In other words, the cost of examination of the risk is grcacer than
the cost of insuring it. A thorough and expert search cnd examination
of the record title, together with insistence upon correction, or ex-
ceptence from coverage, of any defects found, as is the custom in title
insurance, reduces the remaining risk to a very low level. In comrpari-
son with the loss/prenium ratios of 40 to 60 per cent that are experi-
enced by fire and casualty insurance companies, the loss ratios of less
than 2 per cent which have frequently been reported for title insurers
appear ridiculously low.
Title insurers have always held that their primary function is
to avoid losses by discovering title defects before insuring. The in-
dennification that they make, in the event their judgment as to the
soundness of a title proves to be in error, is an almost incidental
part of the total services provided. One title company executive put
it this way:
May I make it plain at the outset that in no case do we
regard ourselves as a casualty company issuing insurance
on the basis of mathematical probabilities of loss. WhTen
we issue a policy, we do so in the firm belief that the
title, even though possibly not technically perfect of
record, cannot be successfully attacked.1
Another title company executive, speaking at the same panel
discussion, emphasized the prevention of losses in thee wo-rds:
I might say that it has been our fortunate exp;rience--
and I venture to say that it is the experience of all of
you--that the suns paid out for title losses are insij-
nificant in relation to the total amount of liability
for title insurance written . . The infreruent
Herbert W. Allen, "Losses and Claims Their Direct and
Indirect Costs," Title News (February, 1949), 54.
- 65 -
occurrence of title losses is sometir. s s-ized uron to
support the argument that most titles are good and that
title insurance is largely unnecossary. The proponents
of this argument overlook the fact that if mcot titles
are good, it is in great measure due to the fact that
title insurers, through their vigilance in uncove~iin
defects in titles an- their insistence u on ,he curins
of defects as a condition for the issuance of unqualified
insurance, have made the titles eood.
The well organized title insurance company . e::-
pends huge sums of money in paying for the services of
personnel with experience in real property law; in build-
ing up a title plant, the abstracting of public records,
maps, surveys, and other documents not otherwise avail-
able; and in the maintenance of these records year after
year at great expense.
All of the expenditures discussed go toward reducing
the risk of title loss and might well be called payment
of losses in advance ... .2
Years ago title insurance companies beg.n to realize that their
very low loss ratios were being looked at with suspicion. In 1941,
Charlton L. Hall, President of the American Title Association, argued
that the industry should evolve a system whereby the production (search
and examination) charge and the risk charge would be separate. T-his
would tend to reduce unfavorable criticism of the title insurance
industry such as that by the person who cormented on the fact that the
reported ratio of title losses paid to net premiums written by state
of Washington title insurance companies in 1938 was only slightly
over one per cent. Observing this, the person stated that title insur-
ance companies collected premiums at the rate of $36.CO for each $1.3C
disbursed to customers, and that "this is the kind of racket that makes
2Herman Berniker, "Losses and Claims Their Direct and Indirect
Costs," (A panel discussion), Title News (February, 1949), 54.
- 66 -
the slot machine operator turn green with envy."3 This man failed to
noze the distortion in reported loss ratios which results from charges
other than premiums being included in "premium income," and he served
to be assuming that all income, except for direct losses paid, is
profit. Title insurance companies have low loss ratios but they have
unusually high expense ratios.
In addition to overstatement of the premium base, the method
of defining "losses," until very recent years, has also caused loss
ratios to appear to be lower than they actually were. Historically,
title insurance companies have reported as losses only direct sums caid
to claimants, but excluding the expenses of investigating claims, costs
of litigation in defending titles, and other claim adjustment expense.
For years title companies seemed to be striving to keep their reported
losses at a minimum. This was partly because losses to some extent
implied carelessness in search and examination. It was a natter of
pride, as well as profit, for a company to have low losses. The words
of two title insurance company executives, speaking at the 1951 annual
meeting of the American T''lle Association are illustrative:
It appears that prior to 1947 most of us reported our losses,
if we reported them at all, on a basis that would show the
lowest amount of dollars a year, which would be the amount
actually paid to policyholders . .
It is submitted that there are several other loss eler-.nts,
the omission of which, so minimizes a statement of losses as
to make it inaccurate, if not completely deceptive. These
are: (1) Amounts paid out to others than policyholders in
3Charlton L. Hall, "Presidential Address, American Title
Association," Proceedings reported in Title ::ews (Ilov'mber, 1941), 9.
order to cure defects insured against. (2) Paye.ants r.:de
to outside attorneys and court costs involved in diseo-
sition of claims whether with paynant of loss oC without.
(3) The wh.hole or an accurately allocated part of the
salaries and expenses, rent, light, t'aveling, steno-
graphic, of inside counsel and claim adjust.~nt depar.-
rents. (4) That part o' officers' salaries and other
items which by a proper cost accounting system, may bc
allocated to losses and claims.4
. The ne.ber companies all recognized that mos- of
us had kept very inadequate records on losses, and es-
pecially on the items of expense and overhec.i, vhich is
an integr-al part of the handling and settlement of every
claim, however trivial; . .. I still shniicr every
time I recall the pride with which the executives of
.several companies rea.ortd their extremely low
loss ratios at the rid-w:inter meetir- in l imphis in 1948.
This resulted from figuring percentages against gross
premiums which, in all cases, if I a:a not mistaken, in-
cluded record searching, examination cost and oftenti:-es
closing and escrow fees. Further, no account ,was tak-n
of any cost incurred in settling those claims for oi'ficers'
and employees' salaries, overhead, telephone and telegraph
expense, or travel expense. The result was a so-cali d
loss ratio of anywhere from 1.2S to 1.7p. Certainly it
would have been absolutely impossible with these figures
as a basis to have justified much of any prcmiun for our
underwriting risk . .5
Historical Loss PRatios
As a result of the definitions custc:rtrily adopted for premiumss"
and "losses" described above, loss ratios of betl-en one and two pzr
cent occur most frequently in past studies of title insurance.
4-enry J. Davenport, "Title Insurance Losses and Claims,"
Title Iews (March, 1952), 97.
5M:urray L. Jones, "Title Insurance Loss Data, Claim xpmnae
Incident Thereto," Title News (.'rch, 1952), 104.
- 67 -
- 68 -
The earliest computation found, that of Winfree, show';d the
loss ratio for sixty-three companies to average about 1.5 par cent.6
Daniel Gage refers to a report made in 1928 on seventy-one companies
which found the less ratio to be slightly less than one per cent.
Gage's own study of 108 companies produced a ratio of 3.21 per cent,
but the differences by state varied from .40 to 8.12 per cent. Gage
concluded that differing definitions of "loss" and "premiuns" caused
the wide variation. The three states he thought to be most representa-
tive reported ratios of 1.95 per cent, 1.68 per cent, and 1.46 par
The Title Insurance and Trust Company, Los Angeles, reported
a loss ratio for the thirty-five years, 1911 to 1945 inclusive, of
1.19 per cent. It was noted that the loss figure reported included
only direct payments to claimants, not indirect costs such as legal
fees and court costs.8
Johnstone found a ratio of 1.69 per cent for the average of
all states and territories of the United States, excepting IllinoiL,
for the year 1954.9
Current Losses vs. Current Premiums
There is another factor which gives loss ratios cozpu,-ed for
6W. B. Winfree, "Title Insurance Losses," Lauyr and Banker
(July-August, 1922), 247.
7GaZe, op. cit., pp. 111-114.
8Allen, op. cit., p. 54.
9Johnstone, op. cit., pp. 518-519.
- 69 -
title insurance companies a downward bias, causing the actual ratio
to be understated. This is simply that the loses incurred during
any current period apply to policies that have been outstanding for
various number of years. Logically, loss ratios should be computed
by relating losses to the premiums received when the correspondirg
risks were underwritten, rather than comparing current losses to cur-
rent premium income. To make the proper comparison in the case of
title insurance companies would necessitate waiting an extended nurber
of years after each year's underwriting, until most of the losses uderor
the policies issued in a given year, were believed to have been incur-
red, before computing a tentative loss ratio. Then, as additional
losses occurred the ratio would have to be adjust.d. There would be
no end to the process because of the large magnitude of potential lia-
bility to which a title insurance company always remains subject,
although for practical purposes twenty years ild be adequate.
Since such a delay is ludicrous, the only feasible way of
computing loss ratios is to relate current losses to current pre::iu
income, recognizing that a rising level of underwriting activity will
cause a loss ratio so computed to be understated by the amount of
the grow-th factor.
Title insurance officials have also argued that potential
losses tend to be concealed during periods of business prosperity,
and that only a severe deflation will show the true Magnitue of loss
expectancy. In addition, of course, the building cycle, to which
- 70 -
the title insurance business is closely tied, is a long cycle of
perhaps 17 to 23 years.10
Policy Age As a Risk Feator
The foregoing discussion raises the question: When are losses
most likely to occur after a policy of title insurance has been written
In the opinion of one title insurance company executive, the first ten
years after issuance of a policy is the dangerous period, and the first
five years is probably twice as hazardous as the second five years.
This official estimated that the first ten years after assumption of
risk is responsible for sixty-five per cent of the losses; between ten
and twenty years, thirty per cent; and over twenty years, five per
The president of another title insurance company, reporting
on the results of questionnaires from 17 Atlantic Coast companies
All but three of the seventeen reporting companies have
been insuring titles for over 20 years and five of them
for more than 60 years. Yet 72% of the dollars of loss
in the eighteen months ended June 30, 1955 arose within
5 years of the policy date and 90' within ten years
10R. W. Jordon, Jr., "Experience in Losses and Claims,
nationall Companies," Title Ncws (December, 1953), 70-74.
1Lawrence R. Zerfing, "Losses Under Title Insur ance,"
Title INevs (lTove.mber, 1941), 23-
12William H. Deatly, "Losses and Caims," Title ic:ws
(December, 1955), 75.
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Inasmuch as the passage of time is on of the best cu-:atives
for defective titles, it sccns sofe to crcl-.,dc, as those authorities
do, that the majority of losses occur vtirn the first ten years afte
Record vs. lon-Record Defects
Title insurance claims result from two s leccs of 2efccts:
Those due to errors, omissions or mistakes of judgsent in the search
and examination of title; and those that arise from hidden defects,
not matters of record.
Of these two sources of defects there is reneral agreemena
that the first group, those over -which the title insurance com- ny
has at least nominal control, account for the greater nurier and Emouat
of losses. There is not complete agreement nc the relative import -ce
of the two, but the concensus seerns to be th-t about tw-o-thirds of
losses are due to errors and oversights, while one-third result -'o:
happenings not of record. Gc > found 64 por cent of losses due to
record defects, and 36 oPr cenct due to non-rocord defects.13
The President of Title GCuarantoe ard Trust Compa I.eyj Ycrk
About half of our losses result from our own errors of
omission or jumnent. The other half' arise lrom thez
so-called hidden rishs that o.re involved in cary real
estate transaction, such as, to give hut a partiia lisC :
forgery of deeds or mortgages, irmarsonation of one
13rS-a, op. cit., p. 109.
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person by another, incapacity for age or mental imbalance,
undisclosed dower rights, afterborn child, and etc. . .14
It seems to be general agreement thet imst losses are
occasioned by huran errors of two tyres, the first of
which is the mechanical error--not seeing what is on our
own books or in our own files; the second, errors of
While it is true that forgeries and calculated risks are
a part of the ever present hazard of a title company, it
is alarming to note the high percentage o' claims and
losses which are caused by our own errors and ozissions.16
It seems to be clear from the statements a"oove that to a con-
siderable extent title insurance companies ane in the fortunate position
for an insurer of having control over their own losses.
Most Freauent Causes of Losses
Gage's findings, with respect to the most frequent causes of
losses, in order of magnitude of losses incurred were as follows:17
Losses from Record Eazards Scale Factcr
1. Taxes and Assessments 52
2. Judgm.ents 25
3. Mechanics' Liens 11
14William K. Deatly, "Give Thanks for the Title Insurer,"
Title :'ews (February, 1960), 11.
15p. w. Clark, "Experience in Leoses and Claims, Nestern
Area," Title ;:ews (Decerbeer, 1953), 69.
16Earl G. Owens, "Losses and Claims," Title ,cws (December,
17Gage, ep. cit., p. 109.
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Losses from Non-Record Hazards Scale Factor
1. Forgeies 17
2. Encroachments 11
3. Other facts not of record 21
These results tend, in general, to be ccnfir:.2d by more recent
rri-ings, which almost invariably place overlooked taxes and assess-
ments as cause of the largest number of claims. Due to the relatively
small amounts, usually not more than a few hundreds of dollars per
claim, involved in most such losses, several investigators have found
other causes to result in greater dollar amounts. One study four
"easements, covenants, and restrictions, undiscovered by title exami-
nation or improperly certified in the title report" cave rise to the
largest dollar amount of losses raid, nearly 16 per cent of the total.
Real estate taxes and assessments ranked second, accounting for 13 par
cent of the dollar total. Taxes and a.sossments vere responsible for
47 per cena of the total nur.sr of loses, hcwevor.1
Another study placed losses arisina from taxes first in numbers,
and forgeries second in numbers, "but perhaps first in dollars."19
More definite conclusions cannot be d-a;r as to the proportion
of losses due to each possible source. The factors are too variabl-
and subject to change from year to year and f--on comny to ce ny.
The data from a study of 24 eastern title insurance com.panis for the
year 1952 are given as being illustrative, and probably quite tl-.ic-l
lieatly, op. cit., p. 75.
19Zerfing, cp. cit., p. 23.
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of the causes of loss in a given period. The terccntage figure; in
Table 4 are for number of losses not dollar amounts.20
LOSES BY CAU S
Cause of Loss Per cent of Lcsses
Unpaid taxes 41.5
Missed judgements 14.6
Municipal assessments 7.3
Mechanics' liens 4.9
Survey errors 4.9
Missed deed or nortgage 4.9
Disregarding closing instructions 4.9
Violation of restrictions 2.4
Current Practices in Reporting Losses and Premiuxms Earned
In very recent years, particularly since 1960 when a;jor ch.-ges
were made in the annual statement fo-rat, title insurance comc-nies have
been reporting losses and premiius in a manner which produces a higher
loss ratio than in the past. Loss adjustment expenses are now. included
as part of reported losses, while charges for title searches and
examinations, as well as other service fees, are reported separat-ly
from premium income.
The new format is a big improvement over the one in use prior
to 1960. It encourages adoption of cost accounting techniques, tecause
G. . Burlingame, 'Experience in Losses and Cl-ims, Eastern
Area," Title Tews (December, 1953), 66.
- 75 -
a system of expense alloca-ion is necessary to render tihe s'cte., -nt
in a reasonably complete form. This is particularly true of the
expense exhibit, which is much more detailed than formerly.
"Loss Adjustment Expense" is nor a separat- column of the
expense exhibit so that a pro rate share of salaries, rent, >posrc>,
telephone and all other appropriate itens of expense, as ~rell as out-
side counsel fees and court costs, can be allocated to the loss aj'ust-
ment expense category.
Some corranies have better cost accounting systems t-an others,
the smallest companies are o.:st likely to be de-icicnt in this risrpct;
and some companies apparently are nore entirusicatic than others in pro
rating expense items to loss adjustment expense. ihe allocation of
overhead, in particular, is necessarily arbitrary and subject to
different practices. Profit-wise, of cou-:se it nakes no diffe-ence
to a company whether expense items -apear ~ c-a r ocrtratin expense or
loss adjustment e-xpense. The motive 2r .:king the allocation ster.s
from past criticism of the ridiculously 2o: loss ratios, and the
recognition that rate -reglators in future my dLAr-lnd justification
for the title insurance premium rates boi. chr:g.
The motive for separating thi production orr or:k chd:C fr-o..
the pure risk prenmiuu stems from the sa.e sources. In t-hi scaratiZn,
there is also a large element of a:ritrarynCss, -hs t is, ti-;l insrantc,
companies have only been able to cstiL-t, -.hat division c- i:-,:..e tcte
production charge and risk: charge would proper. h- s e is a itar-
- 76 -
relationship between the two, c. g., less effort (e::pense) ix ended
on production ra;es higher losses probable, hence i.n eases the risk
premium, and conversely.
The title insurance industry has been moving in the direction
of more accurate accounting and reporting of the various elements of
income and expense. As a result, the loss ratios computed fo: our
industry sample will not be directly comparable to those computed for
previous periods when different concepts of "losses" and "premiums"
The effects of these differences will be estimated and allowed
for in establishing the criteria against which to measure recent loss
experience as a test of Hypothesis No. 1.
Criteria to Measure Derce of Risl: in Title Undaer'.niting
We have seen that the title insurance industry practice is to
carefully examine and select the risks reich are assumed. Uiner these
circumstances, risks and consequently losses, are to a large degree
controllable by the insurer. The remaining uncertainty to which title
insurance companies are exposed has been shown to be of a low derec,
as reflected in the consistently low loss ratios found in all studies
made over the last forty years.
It would probably be safe to dratr the indicated conclusion
without additional emperical evidence; to conclude thuzi :yp-othesis
:Io. 1 has been confirmed by historical evidence. h;owcvcr, there is
th- possibility that title losses have ruc-tly _sum..ed entirely
o ..th'er test Hypothesis No. 1 unu sudotantiate the tc-a-iveo
conclusion above, the loss ratios frc the industry s -.plu vill e ec.-
utodd and measured against the criteria di.loped below to detes-'ine
if title underwriting risks are still of the sam.-' Snral .-:alnitU.I
that have prevailed in the past, and if they are of a '"low" dGrcc.
/iAalysis of the cor.onrnts of losses adjustment
expenses for the four years 1960 th roush 1963 shows that inclusion of
loss adjustment expense has increased the total losses reported by boout
27 per cent. In addition, there has been a racdual taen":ency on tsh pCart
of title insurance companies to include suos in direct losses ,hid ihich
in earlier years night not have been included. Exampics would be sus
paid to third parties, rather than policyholders, in settling title
disputes, outside counsel fees and court costs. In all, it is csti-
mat-a that the total losses reported in recc-t years r.igt be 4GC er
cent higher than those reported ten cr tcn-y years a"o without acy
actual increase in the incidence of losses.
As for the change in methoC of :--poring pr miu.s, this is be-
lieved to have caused a ch ne in loss ratios by a factor of almost
100 Cpr cent. That is, current promi0u..s r-e-tod re o:ly o ut 51
per cent of total operating income, but vutil relatively rcently "he
distinction between sources of inco-e was v.a.ly i r-icd.
The figure reported as "Title Iniur:.ance PKe.i oo =rni" is now
reduced by the amount of the incro.e in Csatutory prcmim rcPO as
as adjusted for reinsurance assEmr.C or coded. Fr:i.,s e.o r-i r-i L
frrom the following calculation: Direct pre.i....3 irttzn a-I reinsrJraic
- 78 -
assuied minus reinsurance ceded mints increase in statutory premium
reserve ecuals premiun-s earned. This too is a refinement that has
developed only recently.
If recent loss experience exceeds that of earlier years by more
than the factors of 40 per cent and 1CO per cent accounted for by changes
in reporting procedures, it r.ay be due to the increased proportion of
business being done on an inter-state basis. Inter-state companies are
exposed to higher risks because they do much of their business on an
"approved attorney" and/or abstracterr agent" basis. This means that
they depend upon a distant local attorney or abstract company to search
and examine titles and issue insurance policies in the title insurance
company's name. Under these circumstances less control by the insuring
company over losses is possible. Carelcsness and dishonesty are two
hazards to which the inter-state companies are more exposed than are
local companies .whose own employees do the search and examination.
Losses due to dishonesty may have increased in recent years. A title
in the process of being insured is a good. tart for a forger or larcen-
ist. For example, one dishonest attorney caused a national company
approximately $200,000 in losses through fraudulent practices over a
period of several years before his defalcations were discovered.21
With all of the above considerations in mind, the stanr-rds
below are adopted for loss/premiums earned rntios as criteria against
which to measure our sample data. The criteria vary by group because
of the greater underwriting risk faced by national co.:panies.
21Jordon, op. cit., p. 70.
- 79 -
Group A 7.0 Per ce-.-
Group B 4.0 por cent
Group C 3.0 pr- cc-t
Aggregate 6.0 per cant
Loss/premiums earned ration ecual to or less th-n zhese resne-c-
tiva amounts will be held to ccnfirm a "olo.'r degrc of undervritic rXs'.
Of course, the term "low" is relative. The standards adopted ha-r for
title insurance loss ratios are certainly low in comparison with t-ose
of any other tyje of insurance. In addition, t-hes standards are decsia-
ed to be of the same general magnitude, after allowance for ch-a-s in
reporting prccedures, as the historical loss ratios which were attack-ed
as "ridiculously" lo~.
To provide loss ratios more cornsrable to those rsportcc in
earlier years, loss/total operating ico- ratios w'll also ^ c-alc--ate.
Since other fees and charges often wmre inclu rci in Fre.i;.:s in earlic-
period.s, and since income derived f.'o srt3h fees ara tyaicae.ly part of
title insurance income, this raxio will bt useful for cc..:ariso- ith
earlier loss ratios and as a less conserva-ive but probably r.c- rte--
is;ic indication of t.he tctal urde-~ritin ri o to ''rich title insrca
ccrpanies are exposed relative to the total volu;'.e of in aom. These
Group A 3. er cent
Group B 2.0 r c-.t
Croup C 1.5 P-r ct--
Aggregate 3-0 per ccn
- 80 -
The criteria for th-s ratio are exactly i. io. e._ch ca.c, of
those for the losc/p-re:nius earned ratio. This z'eflctz t.e f. ct th-._
pre:.:i.u.s earned arc just over 50 per cent of tot-1 o'-ratir- incoe ac
currently reported. Loss ratios less than or equal to those above
will be held to show a low degree of rish.
To provide an indication of the ranTg ani variability of
irnividual con-any loss experience, loss/prem:iu- earned rautio and
loss/total operating income ratios will be computed for each of the
thirty sacm'le ccmoanies for each year 1959 through 1563. TCe cc ..an
will be arrayed within each group amad -sne arrays examined for rani-
anr centr-al tendency. An estimate 'rill be -ade of the probabiliey of
occurrence of loss ratios exceeding twice the criteria acoeted for
the reseective groups. A median values less than the criuericn for The
group will be held to substantiate a low de-ree of risk. Less than 10
par cent of the loss ratios exceeding ;visce the group critericn villa
likewise be held to confirm a Icu dc-Go of1 risk.
Ths stastatisical compilation, and alyres are subject- of
the next section.
Statistical Analysis of Decrc- of .is k i:
li:le Insuraance Undolrr.xr "r
It is clear from Tables 5 a- 6 bcle,. tha. lo s e:.prience .f
mar:edly by size .g-oup. For the period 1559 throug- h 1963, the ratioal
cc..p7anies of Group A report los;/prci .i.s c'ae ratios more than t-.wce
as lar e as the nmdiu.-la-ed co. e-nies of G-rop I. In tura, the C_- -: B
LOSSi2 i.! S F;J- 2 1 P-_ S .- I _
1b'-a-363 A:ffl gO:: -=-, T:. ."- l -2
1 1,0_ 6t :
Ag6regate 56.8, 8.3"" .c E .
A.c.Jat 3.0 2.2 2.8 3-5 3.5 .
/. lregate 2.0 1.8 2.8 1.8 1.7 1.
Arregate 5.9 5.2 7.1 5.9 6.0 .
Source: Anrnual stat-tcl-_r
companies have ratios one and c.:
companies of Grout- C. (Sec t2 -
U:e loos/total ogCrat- g
close to one---1ha of t c los /:.
each resp ctive group Cag:gae ;
the Group rcltios boec abcut the
Ta.le 6 .s in Table 5, t-at ic,
for Grou B arn three -to f2o-- ti:
(Sc colur- to cf Tale G.)
:rtcio .-. co..1 ni"; h-ve
2S. SEc Ap;-ndi:x for dolla-
;-ci. tcC -Zs as l ze s tlh-
inc. ratics", T.bLc 3. )a
dv 2, .aa-l
91 1 80 1 81 1 82
- 82 -
LOSS/TOT.L OPE~RTI-.G INCO:.b InATIOS FR 2T~ -YEA -EfR!OD
1959-1963 AL.3 EACH EAR T.r2L02
Group 1959-1963 1959 1960 1961 1962 193
gresate 3.50 3.20 4.35 3.4 3.5r1 3.3
;.gCraate 1.5 1.0 1.3 1i0 1.7 1-.
A.gregate .8 .7 1.2 .7 .7 -8
AgSresate 3.0 2.6 3.6 2.9 3.1 2.9
Souice: Anrnual state-.-cents. Sze Appenrix for doll-r te.
The group ratios appearing in Tsales 5 and 6 aras rSsigates
and h'encee a ire ;htcd& in pro .or-ion to -te volr.e of cperat-ions o
e.ch company. The Group A co-n-Anies have a very powerful imrluancr
cn the grand a4gregte r-atios becLuse their total voll--a of p;emivu..-
wcm 4.8 tiras, and their op:-ating inco.o cluLae was 4.4 times that
of the Group B companies. The Group L pre:miu volu-e Was 3.3 ti.-.-
thEt of the Group C companies, and. their oerzctirng incc.- ras 2.3
Shovins the relationship in ~aoth-r wiy, the Grou. A cc...-niei
h- 70.6 per cent of the total premium incor..e : 76.5 pc~ cent of
tol-1 ope-rting income. (Se *cable 7 LIlow.)
LOS SS, PSENICI3 E ARA:;L, Ai3 10C-i U &AJLlG CI'.c2
3Y GC= r03 ro -;2c3 1959--963
Ti'otal Per ceni t ?er 3c-_t
Group Losses Premi'um Oer-Cting Prexmiu: s Opera ins
earned inc o:.e Earned Ico:
_Acregate $10,360 $152, S9 $292,612 78.6 76.6
3A0 cojte 959 31,519 66,L20 16.4 -7.3
Acra cate 190 9,710 23,349 5.0 6.1
A:6grae- ae $11,519 $194,598 $382,381 100.0 1C0.0
Source: A-n-z1al state:,.erts.
-his wide Lifference in vol:e of b2i:..co dcone by ,: 1 Q.--
zroups explains why t-c loe ess rti ox;e ric..c by Z.e r.-_ n
rmidle-cized cor7-nies have lirctle effect in -;ducing lhe -r-nd a gr,-
sate ratios. The all-cc:.p*ar.y ratios Ca o.'-y slish;ly less ti:ca thcse
for Group A.
As can be seen in Ta'.les 6 thr.ou 13,3 i :ivid&. cc_:'y loss
ex-:1rieces are subject to reter wid2 v"a'i' tions. C his is n. ; iLs,
in, because title losses tcn- to be erratic and u c -_cdictble in cccu'-
ienee. In a edition, there i 3i latituit for variatalon ".- zccr J
eand 7reorti tactics btc co gie. For ax le .c y 1.
- 84 -
.epLocr-s a 17.3 c-r cent loss/i;r:mium ratio the .':.v-Oc perio
1959-1963, yet the loss/oprctin-. inco:.. ratio is crly 3.4 p:r c-nt.
'Lhe first ratio is the hiShest reported for the Group A comlanic;,
but the second is less than avcere fo- tiLat roiu. Th- indicr.io- is
that a s:aller than average amour-t o- inco.- haz. baen ldsigna-te as
premium although other factors may be at or:k cs vwel.
Table 8 show's the loss/premium ratio fcr the Group A co:...i.niL
over the five-year p-riod 1959-1963 to range from 3.3 per cent to 17.3
-pr cent, vith a median value of 8.9 per cent. Tabl-i 9 show the loss/
cperating inccme ratios for this period ra -ea from 1.6 per cent to 14.8
per cent, with a :median value of 3.5 per cent.
LOSS/PEITUi.:S EAR'-D RATIOS TOR C-P.ROlP ARRAkY- D
INr ODER OF 1959-1963 LOSS PATIOS
;umbar 1959-1963 1959 190 1951 152 1953
3 3.3d, 3. C 3. 3 3. 3.3
8 3.3 2.2 1.8 3.4 3.2 5.-
1 4.7 2.7 C.2 4.2 3.1 5.5
6 8.4 10.7 3.1 10.6 10.9 7.0
2 8.6 7.0 4.9 1-.2 9.5 6.8
4 9.3 7.4 10.6 8.9 10.0 9.2
5 9.8 6.1 6.5 7.6 8.6 14.5
9 11.4 1.3 10.7 2-..2 17.6 1.3
10 16.4 26.2 24.5 9.3 23.S .2
7 17.3 14.9 26.8 16.6 12.0 17.3
AjCrcate 6.8 5.8 .3 6. 6..8 .3
Source: Comouted from an-u-l st1tj-3rs.
- 85 -
LOSS/TOTAL OPERATING INCO:. R.iIOS FOR GROUP A AI AYED
Ii OlRs OF 1959-1963 LOSS RATIOS
Juitber 1959-1963 1959 1960 1961 1962 1963
3 1.6% 1.5s 1 1.6% 1.5% 1.8% 1.7%
2 2.1 1.5 1.0 3.2 2.5 1.9
4 2.3 1.8 2.4 2.2 2.6 2.4
8 2.7 1.9 1.5 2.7 2.6 2.4
7 3.4 2.6 5.0 3.3 2.5 3.'
1 3.5 2.2 6.5 3.0 2.2 4.0
5 4.1 2.6 3.3 2.8 3.8 6.7
9 5.3 .6 4.9 11.5 8.6 .6
6 6.1 7.1 2.2 7.8 7.8 5.0
10 14.8 23.6 21.9 8.9 21.8 .2
Aggregate 3.5 3.2 4.3 3.4 3.5 3.3
Source: Computed from annual statements.
The Group B loss/premium ratios, Table 10, range from 1.1 per
cent to 8.2 per cent, with a median value of 2.5 per cent. The Group B
loss/operating income ratios, Table 11, range from .4 per cent to 3.6
per cent, with a median value of 1.4 per cent.
The Group C loss/premium ratios, Table 12, range from zero to
14.5 per cent, with a median value of 1.1 per cent. The Group C loss/
operating income ratios, Table 13, range from zero to 2.1 per cent,
with a median value of .3 por cent.
Of the total of fifty loss/premiumT ratios for Group A, eleven
exceed 14.0 per cent or twice the Group A criterion, a relative fr-c-cy
of .22. For the five-year period two of the ten companies exceed 14.0
- 86 -
LOSS/PREMIUM.S EARXD RATIOS FOR GROL' B ARPEYD
I: 0~EER OF 1959-1963 LOSS RATIOS
,.-ber 1959-1963 1959 1960 1961 19 2 193
13 1.1% 2.9% 1.9% .7 -, .3 1. 1,
14 1.1 .8 1.2 .5 1.8 1.2
18 1.4 .3 1.4 1.6 1.3 2.2
20 1.9 .7 3.1 3.3 .8 1.8
19 2.2 .7 1.9 2.0 2.4 3.4
16 2.9 3.5 2.8 3.2 5.3 o
11 3.5 2.4 2.7 5.3 4.5 2.7
17 3.6 1.6 2.0 3.2 4.0 6.3
15 4.4 2.2 1.9 4.0 1.9 10.3
12 8.2 7.8 12.0 5.0 8.9 7.7
Aggregate 3.0 2.2 2.8 3.5 3.5 3.1
Source: Computed from annual statements.
LOSS/TOTA- OPERATING INCO-:. PATIOS FOR GROUP B AF-RAFYED
IN ORDER OF 1959-1963 LOSS RATIOS
Number 1959-1963 1959 1960 1961 1962 1963
13 .4% .1% .4% .4c, .. .6-,,
14 .5 .3 .5 .2 .7 .5
13 .6 1.0 .7 .3 .2 .7
20 .9 .3 1.4 1.6 .4 .9
12 1.1 1.0 1.5 .7 1.2 1
19 1.7 .5 1.5 1.5 1.8 2.7
16 1.9 2.2 1.8 2.1 3.5 0
11 2.5 1.3 1.9 3.5 3.1 1.8
15 2.7 1.4 1.1 2.4 1.2 6.5
17 3.6 1.6 2.0 4.2 4.0 6.3
AgSregate 1.5 1.0 1.3 1.6 1.7 1.5
Source: Computed from ar-nual st-tcr.crnts.
- 37 -
LCSS/P- :MICLS EA53D PEATICS :OR CROU"? C Aud'P D3
IN ORDSR O' 1959-1963 LOSS R1TIOS
:N ber 1959-1963 1959 1 96 19L 1962 1963
25 0 0 0 0 o0 o o0
26 0 0 0 0 0 0
30 .4 .7 3.5 1.7 0 0
28 .8 0 2.9 0 1.0 0
27 .9 2.4 1.4 0 1.0 0
21 1.3 1.1 1.6 .5 .7 2.3
22 2.3 2.5 4.1 3.4 .8 1.2
23 4.7 0 10.7 4.8 7.4 0
24 8.3 17.6 17.5 2.7 3.4 5.7
29 14.5 8.2 18.0 14.6 20.2 10.1
Ageregate 2.0 1.8 2.8 1.8 1.7 1.8
Source: Computed fro annual statc:aents.
LOSS/TOT.AL OPERTI.LG INCO.32 RP2TO FOR GROUP C _AR1AD
EI CLLR OF 19;9-1963 LOSS PJTIOS
I:vJie r 1959-1963 1959 1S50 .9l 19$2 ,
25 o o 0 o 1 o > o 0 o
26 0 0 0 0 0 0
30 .2 .3 3.3 .3 0 0
28 .3 0 1.2 0 .4 0
24 .3 5.3 .6 .1 .2 .3
23 .3 0 .3 .3 .6 0
27 -5 1.2 .7 0 .5 0
21 1.1 1.0 1. .5 .7 2.1
22 1.3 1.5 2.2 1.9 .5 .7
29 2.1 1.1 2.4 2.0 3.2 1.6
Aregate .8 17 1.2 .7 .7
Source: Computed from annual .t : -
- 88 -
The loss/operating income ratios are less variable;; only nin:
of Group A ratios exceed 7.0 per cent, for a relative frequency of .16.
Over the five-year period only one company exceeds 7.0 per cent.
Of the fifty loss/premiums earned ratios for Group 2, ony three
exceed 8.0 per cent, or twice the Group B criterion, for a relative
frequency of .06. One company is above 8.0 per cent for the five-year
Of the fifty loss/operating income ratios for Group B, three
exceed 4.0 per cent, for a relative frequency of .06. :Io com-any exceeds
4.0 per cent for the period.
Of the fifty loss/prenis ratios for Group C, nine exceed 6.0
per cent, for a relative frequency of .18.
Of the fifty loss/operating income ratios for Group C, o-ly one
exceeds 3.0 per cent, for a relative frequency of .02. No company exceeds
3.0 per cent for the five-year period.
The following discussion sum'.-ri.u how. HXypothesis Yo. 1 tests
when the sample data are .measured against the criteria developed earlier
in this Chapter:
All group aggregates are withi- the c.-ablished criteria for
both loss/premium and locs/oerating income ratios over the five-yc-r
period. The Group A aggregate exceeded its crito-ia for both ratios
in the year 1960, the only infraction for croup ajgregato-. Groups
B and C are well in line with the low historical loss e:i.rience o-
the title insurance industry, with group aggree-te loss/operating
income ratios of 1.5 per cent can .8 per cent respectively.
- 89 -
The title insurance industry, heavily vai:~ eu by th- n-tic-__
companies, appears to be cxperiencing a sli-gtly higher incidence of
losses in recent years than in earlier periods. Com7ared v-,ith the
ratios reported in previous studies, the current loss ratios are
slightly higher than would be ec-ected from the changes in accounting
and reporting procedures which have occurred.
For example, the aggregate loss/operating income ratio for the
industry sample over the five-year pericd 1959-1963, at 3.0 per cent,
is higher than historical loss ratios by bout six--tenths o o o-- -r
cent more than changes in reporting prcaedur-s alone would accent for.
Title insurance fees and premium rates have rcmained level whil
policy coverage has been gradually broadened, particularly fcr :scrtgagc
policies. Inflation has undoubtedly affected t cot of c l of ai settle-
ients, compared with a decade or so ago, but custom, co- peitiion ar.
improved operational techniq.ua.3 have ended to hold dcrn fses ma_
The increase in loss r~tio is -..oiest in -elative t:a A! a, ? tol
miniscule in absolute terms. The lossi'reui.m ratio for tha i-ni.l,-z,
at 5.9 per cent, and the loos/opratirn3 i-'co:.. r2atioC- in 3.0 Per c-_t,
over the five-year period provide positive afir.-atLon that the. ris
inherent in title undler'itins continues to be cf lo' dagrce. ythi-
Io. 1 is held to be confirmed.
CHAPT R V
PROFITABILIT OF TE T--iE !:StJRANCE iDSny: A:D I TS
CAPACITY OF ?2ETII:G FINANCIAL 03LICG.TIOOTS
Operating Versus Investment Assets
The earnings of title insurance companies arise from two sources:
(1) operating income fror title underwriting and allied operations such
as title search, examination, abstract, trustee, and escrow fes; and
(2) investment income from the large proportions of total assets in
the form of securities, mortgage loans, and other inco o-earning debt
or equity instruments. A third source of profits for some companies
ho-ding common stocks has been capital Gains.
The assets employed in investments do not contribute directly
to operating income. Certain minima capi-al and liability reseorvs
re needed to meet the legal requirner.nts for title insurers to provide
assurance of financial responsibility ana protection of policyvholders.
Retained earnings increase the net wro--th cushion beyond -.C 1 req'ie-
...ets. Investment assets, representing statutory premium : reserves and
part uf surplus and capital, normally are no- called upon to r.act
operational requirements or liabilities. In a remote contiinge.J y t-h
night be needed to :..ect liabilities, meanwhile thay can ba as pzoftbly
invested as possible in keeping with maintenance of financial rec si-
bility and protection of policyholders. Li.:itatice- i..;osoE Ly s-uy e
alco operate as restraints, in Ceneral, not rou-aconrable cn3.
- so -
- 91 -
For our measurement of profitability, o wrill consir o_.i -rui
profits separately from investment earnings ad will distinguish ths
assets employed in operations froZc investr-nat assets. This -'ill r.
determination of the rate of return which net opracin roit p provide
on operating assets. We will then look at the rate of return realized
on investment assets. Finally, we will consider the net after-ta : rat:
of return on net worth that results from the cobr.ination of coratic
and investment earnings.
The percentage composition of assets fo: the ceamle cc- -ries
by size group are presented in Table 14. Some variations bet~- en sgrou-s
are evident, but a large proportion of investment assets is coon to
Investment assets have been defirsd as all securities holdirns,
i. e., stocks and bonds, mortgage loans, coll-tcral loans, a. cavin
and loan shares. Operating assets are simply total assets less in r~-i
The item "Agency and Escrcw Fu"ds (corta)" has been dalet-
entirely from consideration. These a.re s.i hld in -r'ut (cr es3rc.)
for others, usually pending closing of a r-l estate transamcion. T2.
are segregated from the title insurance co.ianies' fu---.s and ^;-sai-
in special accounts. For balance sheet recrtint title inC.ua.
companies show them as an asset and as an o;eactly offatti-; li-ility.
It might appear that these funds could be earnin- interest hile n
escro-, and thus contribute to invoet.ent er-ri~cs, but with r
exceptions such funds ara in demand doeosixs. Since thrse -f~es d.