BUREAU OF INSURANCE LETTER 2004-07*
In March, 2003, the Bureau of Insurance issued an administrative letter addressing the discriminatory aspects of special rate schedules for certain title insurance agency operations which were higher than the state-wide published rate schedules. The language of the letter was broad enough to apply not only to that questionable practice, but also to discounts and competitive bidding by insurers. After a number of follow-up questions regarding the intended extent of the Bureau's letter and a meeting at the Bureau of Insurance discussing a wide range of issues, the Bureau withdrew the letter to further study the issue.
On November 5, 2004, the Bureau issued Administrative Letter 2004-07, again addressing discriminatory pricing in the title insurance industry. The Bureau's renewed interest in the topic appears to have been driven by complaints from the Northern Virginia area regarding the practice of offering discount coupons to consumers as an inducement to obtain title insurance business. Such practices were styled as "rebating" by the Bureau in its letter. Also noted as objectionable by the Bureau were discounts in order to meet a competitor's pricing, forfeiture of an agent's commissions to lower closing costs, and providing ancillary services at no cost, or reduced cost, in order to obtain a title insurance order.
The letter reiterates the statutory guideline for premium pricing: that the risk rate be reasonable and adequate for the class of risk to which it applies and not be unfairly discriminatory between risks involving essentially the same hazards and expense elements. The Bureau did not provide any guidelines regarding classification of risk or expense elements for the title insurers. The overall tenor of the letter suggests that insurers may continue to use their published rate schedules, but that any variations upward, or downward, from the published premium will need to be justified by a rational, and documented, increase or decrease in risk. The letter does not address the fact that title insurers, unlike health, life and other casualty lines of insurance, are a risk elimination line of insurance, and most do not have strong "raw" actuarial data, or the staff to analyze such data. Historically, insurer losses arose from "hidden" defects and errors in the examination of the title. More recently, losses have occurred for risks identified as objectionable by purchasers and lenders, and assumed by the insurers. In some cases, the insurer assessed a hazardous risk premium; at other times, the risk was deemed acceptable with no increase in premium.
One consequence of this administrative letter may force a change in the way transactional attorneys obtain a price quotation prior to placing the title insurance order. With no information other that the proposed purchase price, the title insurance companies will be unable to document their files as to the "specific, documented and representative" differences in risk leading to their quotation. In the event of a Bureau audit of their files, permitted under both the Insurance Code and CRESPA, an insurer unable to justify a deviation from their published rates will be subject to fines and criminal penalties.
Another possible response by the insurers will be eliminate what in the title industry are called "extended coverage" policies, those without the pre-printed general exceptions, or without general affirmative coverages dealing with those general risks. Deleting the general exceptions expose the insurers to additional risk. In California and other states which use the CLTA model, additional premium is necessary to obtain the extended coverage.
Another consequence of the letter may be that title insurers will be unable
to calculate risk and premium based on their "seat of the pants" experience
and judgment, as they have in the past. Applying strict actuarial standards
for pricing title risks is sure to raise all the insurers' overhead expenses.
Rather than bear that expense internally, they may seek state approval for a
rating bureau, as is the practice in Pennsylvania, New Jersey and other states;
or ask the state to bear the expense by promulgating premium rates, as is the
practice in Florida, Texas and other states.
The Bureau's letter focuses on the discriminatory aspects of insurance pricing. The Bureau regulates insurance companies in order to meet other societal goals. These include:
encouraging the shifting of risk through insurance in order to support other economic activity beneficial to the Commonwealth;
continued solvency of the insurance industry,
so insurance remains a viable economic alternative,
so existing and future policy holders are protected,
so those companies which are publicly traded remain a viable economic investment;the desire of participants in the real estate industry, including federal lending agencies, to see the cost of transactions decrease; and
non-discrimination between the various consumers of insurance products.
The timing of the letter may have served a two-fold purpose. The letter may be both a response to complaints regarding competitive practices in portions of the Commonwealth and an effort by the Bureau to force the insurers to seek legislative or regulatory solutions to the tensions between the divergent goals of a regulated industry, even one as lightly regulated as title insurance has been.
*This document was posted on the Virginia State Bar Real Property Section web site by an anonymous author.