title: The $4,000 insurance policy designed to never pay out
author: Complex Systems with Patrick McKenzie (patio11)
contenttype: podcast
publication: Complex Systems with Patrick McKenzie (patio11)
published: 2025-11-13T07:00:20
sourceurl: https://pscrb.fm/rss/p/prfx.byspotify.com/e/media.transistor.fm/edaf0b24/0c6b2820.mp3
word_count: 5241
Welcome to Complex Systems, where we discuss the technical, organizational, and human factors underpinning why the world works the way it does. Hi, to you, everyone. My name is Patrick McKenzie, a better knownness patio left on the Internet. So when I used to do consulting for software companies, I often consulted with them on pricing advice. And my catchphrase in those days was charge more. And so it's very difficult to impress or embarrass me with the amount of money that someone is charging for a service. I largely think that capitalism will sort it out. But I bought a home recently and $3,415 went to a company that almost no listeners of this podcast have ever heard of for a service which is designed to never be performed. And so I wanted to dig into that a little bit. And so I'm going to read an essay that I wrote working title insurance about title insurance, which is the cause of that line at them. And as usual, for this format of an episode, I'm going to interject some commentary between the lines of the essay as written. My family recently bought a duplex in Chicago after years of living in Japan. This exposed me to reliable banking influencer content. One fast of it is the largest bill you'll ever get from the insurance industry for the most inscrutable reason, which I thought would be interestingly cover. Every time you transact in property, you will notice a variety of tiki tack transactional frictions added to a hopefully itemized list. The largest by substantial margin are agent commissions, which accommodate substantial scrutiny for their set by a disciplined cartel character. Next up on the list is a bundle of services around title. The rest is a mix of government fee pass-throughs and obvious nonsense, such as the $125 water processing fee. A $55 wire transfer where that number is just made up, etc. But if I were to go through each of the 16 line items, something to $1400, we'd be here all day. So let's talk about the title industry. What is title anyway? Ownership is a bundle of property rights, which exclude others from using a thing, and which are hopefully, for the owner, enforced by the legal system in the case where the larger societal system fails to agree on reality. This is the very orthodox, first-year law school answer at any rate. Title and real property is the aggregate of rights, commitments, and contracts which make up a ownership claim. And here it gets into the gloriously wonky real estate operational trivia about the difference between an easement versus an encroachment, the just the ability of restrictive covenants written by societies far less enlightened than the present, and similar. But in common usage, you can round title to who owns this address, and how do we know? You might think that you know about title because you can look it up in a database, probably maintaining about the government. Here you run into a fascinating historical detail. Distributed versus centralized database designing and property rights. Many people assume ownership is recorded in some sort of government database, in the same sense that your bank balance is recorded in some sort of bank database. If you assume this, you're right, for many places in the world. For example, if you wonder who owns a particular liver of Tokyo, you can hire a judicial scrivener to go ask the government, and in a fairly deterministic fashion, they will bring back to you a piece of paper saying that the legal affairs bureau records show one Patrick McKenzie as very definitely owning it. The piece of paper suffices this proof of title for almost all purposes in Japan. Court's lenders and the ward office will all treat it as one step below holy writ. The United States, perhaps surprisingly, is not operationally capable of producing that piece of paper. There is no government body in the United States, which will confidently say that, as of this incident, Patrick owns this property to the exclusion of all others. Serious professionals who work in or adjacent to the real estate industry understand this in capacity of the United States and organize their lives around it. As a broad sketch of varied practice over the 50 states, the relevant government body, here, the county clerk's office, does not record ownership, but rather records certain private transactions. Current ownership is not an independent fact. Current ownership is the sum of all compounding transactions since time not quite immemorial. Cryptocurrency enthusiasts might see a parallel. Blockchains typically don't record balances. Softer operating on top of the blockchain probabilistically estimates balances by being aware of all transactions that happen since Genesis. At some point in the very near future, it will be a matter of the public record that I bought a property from a particular seller, and that a bank filed a lien against that property due to me taking out a mortgage. Users of the data bills will infer that since the last few entries in the database were that seller buying a property from someone else, recording a mortgage and extinguishing the same mortgage on full payment, and there are no other recent entries that I very probably own the property. There is an important difference between very probably owns and certainly owns. A quick digression for privacy-minded buyers. I lied. I don't actually own any property in Chicago. My wife and I are beneficiaries of land trust. The land trust actually owns the property. It is contractually obligated to allow us to live there, receive all rents and other benefits to which derive from ownership, and pay us when the trust decides to sell the property, which it will eventually do. The trustee cannot independently decide to sell the property. It must, under long contract, faithfully execute our directives. That sure sounds like ownership, Patrick. Oh yeah, it's designed to be equivalent to ownership in every way except basically one. While there are other reasons to use them, the dominant case for land trusts is mild privacy preservation. Because maintaining records regarding real estate implicates the public trust in much of the United States, those records are public records. When this required actually slipping down to the county clerk's office to review yellowing papers or microfiche, the fact of the records being public was an interesting bit of operational inertia for practitioners but had little impact on owners. But we have computer systems these days maintaining the records and also vast secondary ecosystems of data brokers who ingest public records at its scale and collate them with other information about people, searchable by other identifiers. As a consequence of this in Chicago and many other American seduce, if you know a homeowner's name or address or phone number or, well, anything, you can have the full text of their mortgage address purchase price, monthly payment, et cetera, et cetera, with about 30 seconds of effort. No log in or reason is required. Many people react quite negatively when they learn this. If you are currently reacting negatively, I express no judgment. This strikes me as similar to many questions about privacy rights. It's a range of human preferences is wider than anticipated, framing influences perception quite a bit. Anyone on Twitter can figure out your children's exact walks to school, sounds different than your property tax payment as a public record, despite them being the same physical database entry. Our laws have, as a descriptive and not normative statement, not been updated on the wake of technological progress. And so I pay a very boring company $300 a year for two page contract that makes them our trustee. They have that contract in a filing cabinet. It is assuming consequent execution, always a risk in the real estate industry, not cross referenced in any databases. You can get them to show it to you, but you'll need a court order and fighting that court order is basically the reason for existing. Many people, when they learn about land trusts, immediately assume that something extremely hinky is going on. Not so much. It's an extremely common way for savvy people to own property. It is a no-way loophole. The same polity, which told its elected representatives that it wants property records to be public, also told its elected representatives that it wants to exempt the rich, the powerful, and the savvy from that requirement. This is a commentary on the American political system, certainly. Anyhow, should you want to avail yourself of this the next time you buy property, just tell your real estate attorney, what's the privacy option in the state, land trust, or something? They do this all at the time. Or you can choose to have your full text mortgage publicly available and automatically imported into hundreds of data sets, whichever you prefer. As long as I'm adding, I grew up discussing real estate quirks of the dinner table, sorry, not sorry notes. Another use case for land trusts is that judgments against individuals are more difficult to enforce against property held in a trust. LLCs are also commonly spun up to act as legal firewalls for that reason. Ask your friendly neighborhood real estate lawyer. This is common knowledge in that community of practice. Like most complex systems underlying how the world works, it is very understandable by mortal minds and people who tell you otherwise are lying to you. High confidence and complete confidence are different. Perhaps the digression about land trust itself convinced you that if someone tells you they own a property and want to sell it to you, that claim might be more difficult to verify than you'd naively expect. It is also a claim that can sometimes be falsified well after a transaction. Suppose a person lives in the community property state. One day, in the throes of passion, they swear they're undying love and devotion in front of a justice of the peace. Perhaps in a commercial establishment in a jurisdiction well known in popular fiction, for facilitating other than considerate of house of this nature. Linked in the essay then. Subtweeting and Las Vegas and Nevada here. That passion wanes along with the alcohol and everyone involved just tries to forget this incident. A year later, they purchase the property using their own money and a mortgage. And then in the future, they sell their property without asking for permission from their spouse because socially speaking, they are not married. Does the new buyer actually own the property? No, they do not. Because that property has been fraudulently transferred to them against the interests of a spouse with a 50% claim to it by law. Does the person purchasing it from them actually own the property? Again, no, they do not. You might sensibly object that no database reasonably available to those innocent buyers recorded the fact of the out of state marriage. Law does not care and remediation at this point will be extensive and expensive. If it sounds implausible that marriages are not trivially searchable, the marriage is equally valid if conducted overseas. For example, when an American marries a Japanese person in Japan, the right US government agency to register that fact with is no one at all. My wife and I joke about our unlicensed marriage, but it is absolutely valid in the US and rights under it are enforceable by US courts because of the principle of comedy. Comedy doesn't carry your sequel query returns your records. As an aside, after writing this essay, I learned that California for reasons of its own has a magic kind of marriage, which is intentionally not recorded in anyone's records except the efficient of the marriage. But you're absolutely married in California, even if your marriage is secret from almost all people in the state. I would love to hear the legislative debate on why that was a priority for California, but outside the scope of this essay. Undiscovered marriage torpedoes real estate deal after the fact sounds far fetched. I know, I know, every real estate lawyer has variants of this story in particular and another few dozen with similar effect. Partially they're deployed tactically to drum up additional work for real estate lawyers. And partially they're only slightly fictionalized versions of real cases where the full details are recorded first posterity by court reporters. In the category of particularly historically well attested to title disputes, a particular family lost their home three times due to title defects. The family was forced to migrate as a result of these disasters. The young son, perhaps scarred by them, later went on to practice law here in Illinois. He is better known for other work like writing the impanse patient proclamation. So we have a system for mediating title defects. Title insurance and title searches. Our first procedural countermeasure is that one hires a professional to diligently conduct quote title searches and quote. And indeed someone is certainly going to bill you for doing this work and for a non obvious risk transfer incident to doing that work. But simply querying the database harder will not and cannot shake out all title problems. Back in the days of yellowing a paper in microfiche, knowing how hard your title search research was actually a cost question. Now that a 12 year old can do a physically equivalent search, the competence distribution is slightly narrower than it used to be. For all those edge cases, which no amount of searching candy risk, there exists title insurance. It is a specialized insurance policy, which says that if there's an undiscovered defect in title, the insurance company will pay for the expensive and painful remediation up to and inclusive of simply refunding the entire purchase price of the property to the insured buyer or lender. It is critical to understand that title insurance is effectively mandatory since almost all purchases are financed. Lenders will require a policy be purchased and they are themselves similarly obligated to require this due to the supply chain for mortgage financing. Title insurance has been called an expensive racket. A wank might say this is grossly unfair to rackets. Why? Well, it comes down to how title insurance is priced, sold and purchased. To understand that, three magic insurance words you should know, frequency, severity, loss ratio. Frequency is the rate of occurrence of claims. Severity is the cost of claims, considered to have claims happening. Loss ratio is the total amount of paid out claims divided by collected premiums. Title insurance has extraordinary low frequency for insurance products. However, when it does pay, the severity can be pretty high. Title insurance defenders will tell you that the reason title insurance is expensive is because the insurance company is promising to literally buy a house in an event of a problem. Title insurance defenders are dissimulating, though, because the actual loss ratio on title insurance policies is laughably low. This number is exhaustively tracked by insurance regulators and floats around the 5% region. And so, of the $4,000 to show that I paid in title insurance, the underwriter expects to pay out $200 and losses. A high loss ratio means an insurance policy is inexpensive relative to the actual risks it ensures. A low loss ratio means the opposite. Title policies are among the most expensive insurance policies issued for any risk whatsoever. Now, you might ask, what is a typical insurance loss ratio? These are not unknowable numbers, they're some of the most accurate figures captured by capitalism, with a combination of financial institutions and government regulators obsessed over a quarter to quarter variations in them. Let me quote a couple of representative examples. Fire, 65%, workers count, 48%, medical professional liability, 56%, auto liability, 76%, homeowner, 82%, even travel insurance, which is legendarily a poor option for customers, for reasons, pays substantially more out in flames than title insurance does. So why does this policy cost 10 to 20 times as much as other comparable insurance risks? One very quirky risk transfer and a statistical artifact. We mentioned that title insurance is bound fairly tightly with conducting a title search. In theory, one needs to chain that title search backwards for a few hundred years, at which point there will be an entry that sounds something like seated by the king of Spain to the United States, or acquired by right of conquest. These are absolutely real facts that appear in title records. If you want to pay six figures, you can get a degree in philosophizing that all properties based on theft, late-stage capitalism, blotted blah blah, but few people who work in title assurance have that sort of degree. In practice, most title searches are strictly limited. My transaction obligated the searcher to do back breaking labor and laboriously read 24 months of transactions, i.e. two transactions, which were taken on specialist 30 seconds to find using an online publicly available portal. They were not required to read several dozen transactions going back to the digit decision of records, which gets you to almost one I was born, or try to reconstruct what happened to Chicago title records in 1871 in the wake of the Chicago Fire. For geoligently reading, two search results, the searcher was paid $260, or were they? Yes, according to an invoice, not really according to the title industry, but yes, again, in reality, they were. The reason the title industry says the $260 not actually earned solely for reading two records, is that there is a complex contractual risk transfer happening incident to the search and determining insurability of the title. They acting as the agent of the insurance underwriter, this would be called a carrier of most insurance industries, but in title underwriter is used to mean the insurance company and not a specific professional at the insurance company. They represent and warranty that they're making commercially reasonable efforts to avoid, quote, on record, and quote, title flaws, ie, failing to read those search results accurately. The title insurance industry expects there to be three main categories of claims. One, vanishingly likely, this percent of claims, but extremely evocative, is a historical defect, where the king of Spain, or in Illinois, far more likely an Indian tribe, or the federal government, has a used to be able to concern about the original transfer of land to private ownership. The far more likely type of claim is off record flaws, where someone has ownership, but that is reflected in the search records. The above ownership by undiscovered marriage scenarios are examples of off record claims. There's an infinite universe of fact patterns that can result in them, though. This is substantiated by title insurance exists. Then there are the on record flaws, where somebody goofed and nobody caught it before the transaction closed. There's a clear indication in search results that the seller lacks legal rights to sell the property. Maybe the mortgage isn't paid and arrangements haven't been made. Maybe they haven't gotten a lien released. Maybe they are in the midst of an unresolved divorce. Maybe there is a charming historical anomaly, indeed. Some anomalies are of a variety that are presumptively void in present-day America, like race, restriction, confidence on the sale and transfer of property. As an aside, another factor that you'll frequently see in title anomalies is that well surveyors are wonderful professionals and government clerks or government clerks. But sometimes someone screws something up with regards to say recording the precise location of a property line. And if the precise location of the property line as written in the title documents, it doesn't match the property line that actually exists in the fiscal universe. Then someone has to make the appropriate edits and go through a bit of a process there, and that can delight closer. In the case of an on record flaw, where the searcher, who is also usually the agent of the title insurance company, done goofed in theory, the title insurance company can put the claim back on the reagent. In theory, that should result in the system paying a claim without the claim showing up in the loss ratio. In theory, this means that title insurance is as expensive as it looks and practice this basically never happens. But it's a nice theory on why title insurance deserve agents deserve to be paid 80 to 85% of the insurance premium. These are standard numbers in Illinois. In some states, it goes as high as 95%. This is, I rush to add, done in the clear light of day, it is definitely not a kickback. A kickback would require someone involved to feel shame. Since basically never happens, as the claim about reality is, can be measured with numbers. I'll observe that title insurance agents themselves carry insurance policies. One important genre is error and emissions insurance, which will cover them if, for example, they goof and actually have to reimburse a purchaser or lender without the title insurance company covering it. These policies themselves have a price and that in price code the information we're talking basis points on basis points of risk here. So why do title insurance agents actually get paid so richly, directly driving up the cost of title insurance? How title insurance is sold? In theory, there is a vibrant functioning market in title insurance with thousands of agents ultimately backed by dozens of carriers in Illinois. Price should flow down to the minimum amount of loss ratio plus administrative cost plus profit required to sustain a vibrant insurance industry. In practice, nobody shops for title insurance. I write articles like this as my actual literal job and I didn't shop for title insurance. I use the insurance company nominated by the seller's lawyer. Unsurprisingly, the seller's lawyer nominated the insurance company that she is an agent of. This was disclosed in an entirely above board fashion and one of dozens of documents of paper sent back and forth during the buying process. You are welcome to your estimate of whether anyone saw fit to explain that document as anything other than sign this to continue. I think the acknowledgement of an ad read sounds cooler in Japanese. Cool, right? Let me tell you a scary story. You work in marketing and are all set for the new campaign. Leadership to love the wireframes design produced in their usual tool chain and everyone is plus one for launch. Except your customers can't actually click on a wireframe. Engineering told you that no one ever gets promoted to staff engineer for just quote making websites and quote. And it's not quite what design envisioned. We've all been there unless you use Framer a sponsor of today's episode. Framer already built the fastest way to publish beautiful production ready websites and it's now redefining how we design for the web. With the recent launch of design pages a free canvas based design tool Framer is more than a site builder. It's a true all in one design platform from social assets to campaign visuals to vectors and icons all the way to a live site. Framer is where ITS go live start to finish. Framer is a free full feature design tool think unlimited projects unlimited pages unlimited collaborators and all the essentials. Vectors 3D transforms gradients wire frames everything you need to design totally free. Ready to design iterate and publish all in one tool start creating for free at framer.com slash design and use code complex systems for a free month of framer pro. That's framer.com slash design promo code complex systems all one word all capital letters rules and restrictions may apply. The sellers attorney earned $625 for legal services and connection with transaction 80% to $4,000 in title insurance is $3,200. I think you can make a reasonable estimate as how important that attorney understands having 100% attached rate of title insurance to real estate close success. Like all industries real estate is a very small world particularly since it is conducted hyper locally. I have had many many dinner table discussions from my father in commercial real estate in Chicago for most of his career about this. My attorney who I found independent of any other party to the transaction had interacted with the sellers attorney on numerous occasions. They mutually collaborated to take a straightforward transaction to a speedy and efficient close. You are welcome to your estimate of how many times my attorney called attention to the title insurance fee. That number was set by an act of the sellers attorney or that this fee could be shopped. A really good mental model to carry around for analyzing the finance industry is one shot versus iterated games. Real estate attorney's model residential owner occupied closings has effectively one shot with regards to client, but iterated with respect to the other attorney. If one were conspiratorially minded, one could say unkind words like conflict of interest at this point, but this sort of equilibrium does require anyone to act invidiously. The other attorney is a peer running their business in a socially accepted fashion and very likely quite similar to how you run your own business. You will see them again both professionally and socially. Why make trouble over nothing? One reason I personally, despite being fairly financially sophisticated, did not shop the quote was that I was unsure the juice would be worth the squeeze. It's pretty clearly possible to ensure this transaction for one tenth of the price that pricing prevails in other US markets. It's not obvious to me it would actually be offered by anyone serving Chicago. You can read a lot about this topic in the book, the American title insurance industry, how a cartel fleeces the American customer. I'll give you one guess as to the thesis of this book. Is there anything to be done here? You dear reader are highly likely to transact property many times over the course of your life. There is a specific line item on your disclosure that almost our first spence will skip over. You might make the decision to shop around on that item and in doing so potentially save a few thousand dollars for an hour of work. It's about money as supported by our members, some of whom just got excellent ROI. On a societal level, total insurance adds up fairly quickly. The typical American purchaser will reside in a home for seven years and get repeatedly cheesed in this fashion. We could simply decide as a policy priority to not structure the industry this way. However, this is a classic political economy problem with diffuse costs and concentrated benefits. The real estate industry is extremely politically powerful. It is nationally distributed, extremely well-resourced and staffed by vocal pillars of the community. Those advocates are everywhere and talk to likely voters because their job to do so and are extremely well-liked. The same lawyer who quietly cheesed his buyers on title insurance will, in about half of client interactions, write a client a very obvious, very salient, very memorable check for multiple years of the client's salary. The title insurance industry execs a relatively small rake hidden in the minutia of a complex transaction that most legislators and regulators don't truly understand. There is a strong organized consistency in favor of that rake existing. The consistency is not smokey forces in shadowy back rooms. They are pillars of your community. They are your friends and neighbors. And they independently and through their lobby know how to present this business to the American polity. The industry provides a valuable service and charges money for it unabashedly. The price is set by a vibrant competitive marketplace. Historical infillicitities like kickbacks have mostly been replaced by market mechanisms, like controlled business relationships, which are fully disclosed to the customer. Of course, consumers read and understand disclosures. The state even released model disclosure language, which industry adopted almost universally. Do I think the secular breames likely to change? I would not bet on it over short time frames. But if anyone ever wants to take a serious run into disrupting this industry, I'll happily write you a check. As of the side, over the last few years, there has been some attempt at innovation with respect to title insurance, called the attorney opinion letter, AOL, which unfortunately shadows an acronym for a better known AOL for individuals for certain age. The idea of an attorney opinion letter is basically, look, I'm an attorney. I did the search. I'm not incompetent. You should expect that the title is, like, reasonably deeply free. And if not, put it back on me. The idea of an AOL is that you could generate these at scale from attorneys using some form of software assisted platform likely. And that they would be equivalently acceptable to the mortgage supply chain, meaning Fannie and Freddie and similar have already said, yep, if you've got an AOL, we don't need to see toggle insurance on the typical residential property in most states. They'll be equivalently acceptable to the supply chain. They'll just be cheaper because fundamentally this only takes a few minutes of effort. Possibly, you can convince the attorneys that actually do the buying and selling work to write the AOLs themselves and say, look, if having the insurance company charged $4,000 for the service here and kick you $3,000 back of it, how about you just charge $1,000 for the combination of title search and writing the AOL? And everyone will assume this is fine. We'll push down the total cost of the service customer. It will still be reasonably lucrative for you writing the AOL. It's going to be as much money as you make on the entire closing process or more. And so this aligns with your business model, which is a high rate of low complexity transactions. And so we will see if that comes to prominence over the next couple of years. The legal groundwork for it is laid. My understanding is there are a lot of AOLs that are actually written into the world right now. But the dominant way that people buy homes is still with title insurance and getting cheesed every seven years. Does it matter that people are getting cheesed? Well, the average holding period for an American home is about seven to eight years. And so if you're coughing up $4,000 to the title insurance industry every eight years, you're paying a $500 tax every year for, well, basically no good or service. So is that the worst abuse of the consumer in the entire economy? Probably not. But it seems worth solving. And with that fun thought, I will leave you folks till next week. Thanks very much and see you next week on Complex Systems. Thanks for tuning into this week's episode of Complex Systems. If you have comments, drop me an email or hit me up at patio 11 on Twitter. Ratings and reviews are the lifeblood of new podcasts for SEO reasons. And also because they let me know what you like.