The state is going back to court in a bid to revive controversial rules on the $1 billion-a-year title insurance industry meant to curb lavish spending on parties, sporting events, vacations, luxury gifts, and even strip clubs.
Last week, the state Department of Financial Services asked a state appeals court to reverse a lower court ruling that tossed the rules as an overreach of responsibility that instead rests with state lawmakers, according to an Aug. 6 filing with the Appellate Division of state Supreme Court in Manhattan.
The industry got the rules thrown out last month when a Supreme Court judge there ruled the department had overstepped state law, which the department called an “absurd conclusion” based on a “startling and unprecedented theory that (the agency) lacks to prohibit unlawful pay-to-play inducements and excessive charges by title insurers and agents,” according to the appeal.
Title insurance is a one-time policy that protects banks and borrowers against challenges to ownership for property. Policies must be purchased by anyone who mortgages or refinances a home or other property, but the choice of a title company is almost always made by real estate agents and lawyers, rather than by the buyers who actually pay for it
In 2015, the last year for which figures are available, state residents spent about $1.1 billion on title insurance. Rates in adjoining states, such as Massachusetts, New Jersey and Connecticut, range from 25 percent to 40 percent lower, according to the state.
A title policy on a $200,000 home in the Capital Region could cost about $1,300, compared to $875 in Connecticut, and about $1,000 in Massachusetts and New Jersey, state Financial Services Superintendent Maria Vullo told a panel of state lawmakers in January.
The new rules were proposed in 2017 after a four-year investigation that found the cost of policies was being padded with millions of dollars each year in dubious expenses, like visits to exotic dancers, tickets and luxury box seats to professional sporting events, designer merchandise, lavish meals, and other gifts to the people who choose the policies.
State regulators claim title insurers had been “disguising these expenditures as ‘marketing’ or ‘other expenses’ when making rate requests to the state, according to the appeal. In 2012, the Department of Financial Services rejected a 22 percent rate increase request from the industry and launched its investigation into its finances.
The rules would have forced title companies to to cut insurance rates by 5 percent by mid-June, or instead certify that expenses for the previous six years did not include such improper inducements or resubmit revised acceptable expenses as part of a request for new insurance rates.
But the industry sued in February to block the rules, which went into effect in January, claiming it would lead to job losses, and last month, State Supreme Court Justice Eileen Rakower agreed.
The lawsuit was filed by the New York State Land Title Association, an Albany-based lobbying group, and the Great American Title Agency Inc. and Venture Title Agency Inc. The groups were represented by Mylan Denerstein, who was Gov. Andrew Cuomo’s chief counsel from 2011 to 2014 before leaving to join a New York City law firm
In her decision, Rakower wrote that Vullo’s agency had gone beyond state Insurance Law and that it was “absurd” to believe lawmakers intended to prevent the title insurance industry from marketing its services.
There are some 1,800 title insurance agents in New York, representing a tight network of insurance companies.
But regulators counter that there is no competition in the industry to constrain its expenses, because title insurance is chosen by lawyers and real estate agents, but paid for by the property purchaser at the closing.
“This form of competition has the paradoxical effect of increasing rather than decreasing premium rates,” according to the state’s appeal, “since insurers and agency must charge more money to home buyers in order to fund ever more extravagant inducements to the real estate professional who actually awards title insurance business.”
Title disputes are relatively rare, and only 5 percent of premium dollars are used to cover claims, with the rest going to expenses and profit.
That loss rate is far lower than for the home and auto insurance industry, where about 75 percent of premiums are used to pay claims, according to the Consumer Federation of America, a Washington, D.C.-based advocacy group.