Title Insurance: The new world and the old
14 March 2008
Wherever it is used, the term title insurance has the same fundamental meaning: an indemnity against loss caused by the absence of a right to use land. The triggers capable of causing a loss are many and varied and will differ throughout Europe. The term indemnity, also, will mean subtly different things in different jurisdictions. But the underlying purpose of title insurance globally is, thankfully, common - to compensate for a financial loss without the need to prove negligence on anyone's part.
The difference between insuring against known and unknown triggers has, in the past, typified the different ways in which title insurance has been used in the US and Europe respectively. Since it first emerged in 1870, the US has used their version of the product to transfer the risk associated with title examination away from the lawyers and on to insurers. There, the product covers a fairly wide spectrum of potential threats to ownership or use of land - a US-style policy will typically exclude cover for any problems with the title that are known about when the policy is issued.
Title insurance in the European context has a number of significant differences because legal process in Europe dictates that lawyers will investigate title to land thoroughly in order to identify any problems that exist. Problems will therefore be known about and the role that insurance plays has been to provide cover in case any of these known risks actually happens and causes loss.
That said, US-defined title insurance is quickly filtering into more and more European property transactions as the benefits of streamlined due diligence procedures backed up by title insurance proves its value. Understandably progress down this road has been gradual while investors and their lawyers get themselves comfortable with a sample-based due dilligence process backed up by title insurance instead of the full-fat lawyer's report on title. However the benefits are quickly being appreciated - deals that might have failed in the past are now completing on time and legal spend can be focussed on those elements of the deal that actually need it. For example, First Title dealt with the securitisation of rents from 165,000 apartments in Germany last year - the insurance was used to give comfort to the issuer, the ratings agencies and the investors that although the land registration system in Germany would be unable to cope immediately with such a large volume of work, duly registered mortgages would in time emerge so that the loan structure would be solidly based. Without title insurance the transaction is likely to have faltered.
Equally, the traditional European title insurance market that provides cover for identified 'known' risks still has great growth potential for those insurers prepared to adapt their products to their customers needs. In many countries, particularly Central and Eastern Europe, property systems and laws are relatively new and untested. This creates unacceptable levels of uncertainty for developers and their investors and lenders who now look to title insurance for comfort. Conversely, in those European jurisdictions with more established property law systems there is an increasing need for insurance as developers come under pressure from central government and shareholders to meet the demand for residential and commercial property whilst having to work with an ever decreasing land-bank of unencumbered property.
Title insurers offer developers a route to market for covers that are proving necessary in the increasingly regulated and risk-averse markets of Europe. Insurers at the leading edge of the title insurance market are now integrating with other markets to provide comprehensive one-stop insurance solutions. First Title now approaches new markets through an affiliated brokerage structure that enables cover for physical risks (such as environmental contamination or latent defects in buildings) and financial risks (such as tenants covenants, residual property value and tax or other warranties) to be attached to the more traditional title products.
Title insurance has a one main purpose: to make property-related transactions happen and to happen more easily, more quickly and at lower cost. On some occasions, title insurance helps close transactions that could never otherwise have completed. The real challenge for this sector is to help open new investment opportunities for our customers.