You pay the price for TITLE INSURANCE coverage. But everyone else reaps the benefits.

WHO WOULD be foolish enough to shell out several thousand dollars for an overpriced product that they knew little about and would most likely never really need?

Just about everyone who has ever bought a house. Home buyers can spend days haggling with sellers over a few thousand dollars on the purchase price or whether the chandelier conveys. But once the deal is done they don't bat an eyelash at spending another 0.5% to 1% of the mortgage amount as a one-time premium for title insurance. What's more, they don't bother to look for the best deal and probably can't even name their insurer.

Home buyers are in this fix because you can't get a mortgage without title insurance. Lenders require it to protect themselves against any title problems that may surface after the property changes hands. But while it's the lender that benefits, it's generally the homeowner who pays the bill--which totaled more than $8.7 billion in 1999, one-third more than doctors and hospitals spend on medical-malpractice coverage. Home buyers generally funnel all that money directly to the title insurer their real estate agent or settlement company recommends.

So this is title insurance in a nutshell: You, the homeowner, pay a premium to the title company to protect your lender from mistakes made by the company when it does a title search. Are you a sucker, or what?

To make matters worse, even though you're paying the bill, the title company's client is the real estate agent, lender, lawyer or homebuilder who brought in your business. Part of your premium likely goes toward rebates or other rewards for the referral (critics call them kickbacks), which many title insurers consider a cost of doing business.

"At one time, title companies would take entire real estate firms on ski trips," says Erin Toll, director of consumer affairs for the Colorado Division of Insurance, one of several state insurance departments that have been taking more aggressive action against insurers for their cozy business practices. During the past four years California has levied financial penalties totaling more than $4.2 million against title companies for unlawful rebates. Two pending cases could result in an additional $11 million in fines.

"It's a very creative industry, and they are extremely competitive with each other," says Toll. But it's the middlemen, not consumers, who benefit, because companies don't compete on price. "The consumer isn't in a position to exert market pressure to drive down the price of title insurance," says Birny Birnbaum, an economic consultant who has served as an expert witness at title-insurance-rate hearings.

Claims are rare

MOST TITLE problems are discovered and corrected during the title search at the time a property is sold. If a discrepancy comes up after the property has changed hands, the insurer will most likely pay to clear up the problem. In a worst-case scenario--some long-lost cousin of a former owner resurfaces and lays a legitimate claim to the property, for instance--you would lose the house but the insurance would kick in to pay off the mortgage and protect the lender from any loss.

Most claims occur within the first three years of a mortgage, before your equity has built up and while the lender is bearing the lion's share of the risk. If there's a claim, it's the lender, not the policyholder, who collects. Lenders hardly ever collect either, because claims are extremely rare.

Claims are so rare, in fact, that insurers spend as little as 5 cents to 10 cents of every premium dollar to pay them. In Texas, only 2 cents of every premium dollar goes to pay claims. The rest of the money goes toward expenses--including the high fixed cost of maintaining a large database of title information (not to mention the cost of ski trips)--or is retained by the company as profit. By contrast, companies that sell auto or health insurance typically spend 90 cents or more of every premium dollar on claims.

Industry sources say that the most common claims involve a forged signature somewhere in the title chain, which even the most diligent title searcher can't always discern at the time of sale. A classic example is a divorcing couple who,own a piece of property jointly. The husband decides to sell it without his wife's knowledge and forges her signature. When she discovers the fraud and demands her half of the proceeds, the title insurer will most likely negotiate a settlement.

But data from title-company filings with the insurance department in New Mexico, for instance, show that over the past three years, forgeries accounted for an average of only 1% of losses. Errors made by the title company during its search, such as failing to unearth a tax lien or a judgment lien, accounted for more than half of losses, so home buyers end up paying for the company's mistakes.

Despite the combination of infrequent claims and lack of competition, industry profit margins from 1992 to 1996 were in line with other types of insurance, says Charles Nyce, professor of risk management and insurance at the University of Georgia's Terry College of Business. Nyce speculates that strong housing markets since the mid '90s have changed the picture, allowing companies to spread their expenses over more policies and increase their return. "In Texas, title companies have had rates of return in excess of 25% for eight to nine years running," says Birnbaum, well above other lines of insurance, such as auto or homeowners.

Coverage for homeowners

ONCE IN A blue moon, title insurance pays off for homeowners--but only for those who buy a separate policy for themselves. That's what saved Kristin Anderson. When she moved to Apalachicola, Fla., in 1985, she bought a circa-1855 building in the center of town that would eventually become not only her home but also the Long Dream Gallery, a shop that displayed and sold her handmade jewelry and sculpture.

She put down $50,000, borrowed another $60,000 from a bank and subsequently spent tens of thousands of dollars on repairs and improvements. A few months after she purchased the building, Anderson was notified that there was an outstanding mortgage on it. The previous owner had agreed to put up the building as collateral for a loan taken out by a shrimp fisherman named Lucky McLeod to buy a new trawler. Lucky defaulted, and the title examiner missed the unpaid collateral mortgage because it was mistakenly flied under Lucky's name rather than the name of the previous owner.

The case took a decade to resolve, but it didn't cost Anderson a nickel. Her title insurer, First American, one of the three largest companies in the business, paid $113,000 to get a release of the mortgage and another $40,000 for legal expenses. Anderson sold the building two years ago for a $300,000 profit.

As you pay down your mortgage, the lender's exposure to a title defect declines and yours increases. For an additional one-time premium of as little as $30, you can buy an owner's policy (as opposed to the required lender's coverage) to protect your equity.

That's a relatively cheap price for peace of mind, on the remote chance that there's a shrimp fisherman lurking in your home's past. "Without an owner's policy, there's no protection at all for the consumer," says Birnbaum. "Then you're just paying a substantial premium to protect the bank's interest."

In some states you may not have to pay more for owner's coverage. In fact, you may have purchased owner's insurance without realizing it (check your settlement sheet). You'll certainly want an owner's policy if you're paying cash or making a substantial down payment.

In 1995 when retired air-traffic controller Dermon Burchfield of Mabelvale, Ark., paid $35,000 in cash for a small house for his disabled son, he didn't give much thought to the possibility of a title problem. After all, the man from whom he bought the house, also owned the title-and-escrow company that Burchfield's real estate agent recommended.