Escrow Theft: Today’s Challenge in Title Insurance
Title insurance agents play an important role in real estate transactions and are often entrusted with significant funds that are intended to be applied on behalf of the parties to the transaction. A major problem can arise when title agents betray their obligations and embezzle the money entrusted to them. This escrow theft is a serious problem for consumers, the title insurance industry, and the broader real estate community.
Demotech observed the impact of escrow theft on the industry and noticed a significant correlation between the strength of states’ title agent regulations and loss ratios reported by title underwriters. In light of this observation, Demotech undertook a study to analyze the relationship between the strength of state regulations and loss ratios for title insurance.
Demotech published the study, Defalcations: Today’s Challenge in Title Insurance and Our Thoughts on Addressing this Challenge, in 2003. In this initial study, we rated each state and the District of Columbia based on our interpretation of the strength of their agent licensing requirements and reviewed the combined loss ratios for each grouping in states over a five-year period. We concluded that states that adopted the NAIC Model Title Insurance Agent Act, its substantial equivalent, or a stronger set of regulations experienced fewer losses. Our belief was that the difference related to less escrow theft, as well as the beneficial impact of strong licensing standards and increased professionalism.
Over the past decade, Demotech has continued its observation of escrow theft and is now revisiting its study from 2003. This revised study builds upon Demotech’s initial efforts and sets forth Demotech’s current observations and findings.
The following report provides general information about title insurance, the role of the title agent, and the problem of escrow theft; discusses the regulatory effort to address escrow theft; and sets forth Demotech’s premise, assumptions, methodology, conclusions and recommendations.