Fees for Real Estate Closings, Part 2: Title Insurance and Attorney Agents

I've spent a lot of time thinking about the issue of attorneys fees for real estate closings.  Tomorrow, I hope to explain how much I charge clients for these closings, and why I handle fees the way that I do.

But first, I think I need to talk about title insurance, and the role of the attorney as agent for a title insurance company.  Every residential real estate contract that I have ever seen requires the seller of real estate to provide evidence of clear title to the buyer, in the form of what's called an owner's title insurance policy.  This makes sense -- buyers need to know what they are buying.  Title insurance protects against what I call "Brooklyn Bridge" situations, where someone tries to sell you property that they don't own.  It also protects buyers from acquiring title to what may be considered "problem" property (property that is subject to mechanic's liens, property with unpaid taxes, etc.). 

Because owner's title insurance is purchased by the seller for the buyer, the seller's attorney arranges for the purchase of this insurance.  In most cases, the seller's attorney will purchase this insurance through a title company with which the attorney is affiliated.  In return for sending business to the title company, the affiliated attorney (a.k.a. "attorney agent") gets a commission.  If you have ever purchased a home, this shouldn't be a surprise to you -- you probably received a disclosure of the seller's attorney's arrangement with the title company (if any) at closing, or maybe even before.

The cost of title insurance (and the attorney agent's commission) is based on the sales price of the property -- the higher the sales price, the higher the title insurance cost.  Here are some examples from Chicago Title's latest Schedule of Rates:

$200,000 sales price: $870.00 for owner's title insurance

$400,000 sales price: $1,170.00 for owner's title insurance

$600,000 sales price: $1,470.00 for owner's title insurance

The attorney agent's commission will usually be close to (but a little bit less than) the cost of the owner's title insurance.  (My understanding is that the title company makes most of its money elsewhere, such as by acting as escrow agent for the buyer and seller at the closing.)

Is it unfair for an attorney to act as attorney agent? I think the answer to that question is "maybe."  Most real estate attorneys would tell you that the title insurance commissions allow them to keep their attorney's fees low.  It's fairly common to see attorneys charging a $500 fixed fee to represent the seller of residential real estate, and I think it's likely that, if attorneys stopped receiving a commission for title insurance work, this $500 figure would rise quite a bit.

However, the real question is this: does title insurance create a conflict of interest for the seller's attorney?  I think it can.  Not all title insurance companies charge the same fees for the same amounts of coverage, so an attorney agent may be tempted to align himself or herself with the company charging the highest fees (since higher fees mean higher commissions).  I've always felt that attorneys are important to the real estate transaction process because they are (or should be) working only for the benefit of their clients.  Does the attorney agent role work to undermine this?

Comments

[Bob Dean]

Very interesting perspective. Never have thought much about it from the standpoint of a seller's attorney title agent before.

Back east the buyer usually pays for title insurance, closing costs and doc prep. Hence the selling broker -- as opposed to listing broker -- selects the attorney or (far more often) the title company.

Here, too, there has been considerable ethical anguish in the Bar over serving as an attorney for the buyer (and/or mortgagee) as well as agent for the title underwriter.

The solution, used less frequently now than 20 years or more ago, is "Approved Attorney" status, where the attorney certifies title to the title insurer, and the insurer--or its agent--issues title policies based thereupon. Unfortunately, without a rate reduction in such cases, the Attorney-Agent arrangement is obviously more appealing.

In both cases, there is considerable potential for conflicting interests in the case of a thorny title problem (though, fortunately, they are few and far between).

Bob Dean
http://www.go-Titlepro.com