Closing protection coverage provides protection when a title agent fails to comply with written closing instructions. The most costly example of these failures tends to be when a title agent fails to follow instructions for handling money entrusted to them-- particularly when the agent puts the money in their own pocket instead! But closing protection also covers for failure to comply with other written closing instructions-- which are changing with great frequency, due to regulation and other factors. One could even guess that lenders are intentionally drafting their closing instructions in an attempt to include more potential losses under the protection of closing protection coverage.
Seeking support for a proposed increase in closing protection premiums, the Ohio Title Insurance Rating Bureau (OTRIB) authorized Demotech to analyze historical premium and loss experience for closing protection coverage in Ohio. Demotech's analysis found that "the pattern [of losses] is clear - the more recent the experience, the worse the loss and loss adjustment expense ratio."
According to Demotech, the data collected showed that total premiums collected for closing protection coverage have declined, while losses have risen. OTIRB members collected approximately $4.4 Million in Closing Protection Coverage premium in 2011, down from $5 Million in 2010. Losses, however, were nearly $2.6 Million in 2011, up from just under $1 Million in 2010.
Demotech's analysis cited two areas of "uncertainly and risk of material adverse deviation" in losses and loss adjustment expense ratio:
- Given that Title insurance premium levels, and the underlying mortgage activity associated with Title insurance premiums, seem to have stabilized at a relatively low level compared to the peak years of 2003 through 2006, licensed agents that have been hiding escrow shortages or defalcations through a Ponzi like scheme, no longer have the financial capacity to continue the charade. Therefore, recent loss and loss adjustment expense ratios have deteriorated, and are likely to continue to deteriorate, due to the emergence of escrow shortages and defalcations.
- Over the recent past, in response to changes in regulations, in response to suggestions from the United States Department of Housing and Urban Development or in anticipation of rules from the Consumer Finance Protection Bureau, the closing protection instructions issued by lenders have been revised several times. This is in marked contrast to the stability of procedures and instructions that had existed for more than 25 years. in this operating environment, meritorious claims based upon the fundamental coverage document have increased. With additional changes anticipated over the next several years, it is likely that the increased emergence of meritorious claims will continue until closing instructions stabilize and industry familiarity with lender instructions is enhanced.
Demotech is saying here that losses from defalcation are very hard to predict, and closing instructions have changed a lot recently and are expected to continue to change, causing additional losses for events other than defalcations.
The proposed rate change has gone into effect. Rates for Closing Protection Coverage in Ohio are now as follows:
- $40 for a lender, its successors and assigns
- $55 for seller(s)
- $20 for buyer(s) or borrower(s)
- $20 for each additional applicant for title insurance
- There is a minimum premium of $40.
The study also noted that premiums in Ohio for Closing Protection Coverage are "well below the closing protection coverage premiums in other jurisdictions." The premium in Pennsylvania and Delaware is $75, according to Demotech.