The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

4. Title Insurance: The Legal Dimension

4 Title Insurance: The Legal Dimension Evolution of Price Controls The title insurance industry has been protected from competition since 1945 by three public policies: (1) exemption from federal antitrust liability ; (2) state endorsement of fixed prices; and (3) toleration of corporate secrecy about actual losses. This legal structure has led to excessively high rates and reverse competition. This chapter explores how title insurance laws sustain an island of state-controlled prices within America’s predominantly free market economy. The title industry’s governmental protection from price competition began near the end of World War II price controls. Vital defense enterprises, “high-demand” consumer goods, and a few service industries had been required to operate under price controls, production quotas, and quality standards. Supplies were rationed to meet military priorities. Consumer, labor, and corporate management interests each had representatives who were consulted while wartime regulations were enforced. With more than fifteen million young Americans in the armed forces, their war-related economic priorities were reviewed and to a considerable extent accommodated. Prejudicial barriers to the employment of African Americans, Latinos, and women were reduced. As soon as victory was won, however, much of the wartime price control machinery was dismantled. More or less free market competition was restored. One barely noticed exception to this pattern of deregulation was the McCarran-Ferguson Act of 1945.1 Before the Act, going as far back as 1869 (decades before federal antitrust legislation), a judicial ruling exempted the entire insurance industry from being regulated as an interstate business. In Paul v. Virginia, the U.S. Supreme Court had ruled that insurance was not to be regarded as a business over which the federal government held regulatory power under the Constitution’s interstate commerce clause.2 77 The insurance industry’s exemption from federal oversight was changed for a short period seventy-five years later. Near the end of World War II, antitrust laws were ruled applicable to the insurance business. In the 1945 case United States v. Southeastern Underwriters Association , fire insurance companies in Georgia and neighboring Southern states were accused of a criminal conspiracy to fix prices.3 The case was appealed to the U.S. Supreme Court, which reversed the 1869 decision , ruling that under the commerce clause of the Constitution, the U.S. Congress had the power to regulate the business of insurance when it was transacted across state lines. The Sherman Antitrust Act, the Clayton Act, and the Federal Trade Commission Act (laws that had been enacted to stop anticompetitive practices) were found applicable to the title insurance industry.4 The Southeastern Underwriters Association and its two hundred private stock fire insurance members were found guilty of monopolistic and criminal practices. Their illegal practices included fixing premium rates and commissions, as well as using boycott practices and other coercion to force nonmember insurance firms to adhere to the fixed-price practices enforced by the association. The public was under pressure to purchase insurance only from Southeastern Underwriters Association members. Nonmember firms were refused access to reinsurance. Industry lobbyists quickly succeeded in motivating a majority of Congress to neutralize this “unfriendly” Supreme Court ruling. Under the provisions of the McCarran-Ferguson Act, federal jurisdiction over the insurance business was waived in any state that licensed and regulated insurance companies.5 As a result, each state and U.S. territory, in exercise of its powers, can and does maintain a regulatory system for the insurance industry, although insurance companies operate across state lines. Nearly all insurance products are competitively priced. Title insurance is the one exception: within each state, firms evade market price competition. Title insurance premiums are fixed by state law in forty-one out of fifty states. There are four slightly different price determination patterns . They are, with the number of states in which they are used in parentheses: (1) industry rate determination (twenty-one states); (2) rate promulgation by each regulated company (sixteen states); (3) states without price control (nine states); and (4) state promulgation of rates (four states). 78 Title Insurance: The Legal Dimension In the twenty-one “file and use” states, title insurance companies set their own rates by a secret oligarchy that may never meet but does coordinate filings. State officials can disapprove of filed rates during a period that varies between fifteen and seventy-five days. Insurance companies in these “file and use” states must adhere to the approved rates they filed. Rates...