Claims awareness and prevention – not typically what comes to mind when the claims department comes knocking at your door! The nature of insurance, and in our case, title insurance, is that claims are a natural byproduct. Claims are made, sometimes defended or denied, and when necessary, paid. Too often those outside of the claims department do not know or hear about the horror stories of the paid losses. The purpose of this article and future publications is to impart past claims experience to the WFG family so that you can be aware of issues or processes that will prevent claims, and be aware of potential scams or circumstances that can give rise to potentially large losses. We strive to provide our insureds peace of mind that WFG National Title Insurance Company stands behind the policies we and our title agents issue. The first line of defense is providing the necessary tools (training) to those involved in the process of protecting real property interests.
Technology is an integral part of title and closing services. It, of course, allows for faster services, but not always better. Striving for efficiency at the cost of indifference to the details results in preventable claims.
One example of this is conducting business in multiple states. The lack of understanding or not being familiar with local practices is a definite source of claims. In one instance, we had a preventable loss of over $25,000 in connection with the delinquent real property taxes for a single family residence. The subject property was at one time a vacant lot. It was acquired by a contractor who then constructed a single family home. The property was sold to an individual, who subsequently defaulted on the secured purchase money loan. The foreclosing lender eventually acquired the property and sold it to a third party, insured by WFG. When the third party insured owner was in the process of selling the property, he was advised that back taxes in excess of $25,000 remained unpaid (which was the increased assessment for the construction of the home). An investigation determined that the taxing authority was contacted during the insured transaction and payment of over $10,000 was paid for a pending tax sale. It turns out that in Cook County, IL, there are two systems in which prior taxes are maintained. One is for back taxes and another for tax sales. The agent was unaware of this fact. As a result, the outstanding back taxes were never paid at the time of the insured transaction.
The lesson here is to be aware of local practices and procedures for jurisdictions that you do not normally handle.
As we are aware with improvements in technology, measures to prevent cyber fraud, identity theft, fraudulent e-mails, and fraud and forgery transactions must also be equal to the task. WFG continues to seek improvements of its security measures to help reduce those risks.
One of the more common fraud schemes is forged releases or reconveyances. These documents are routinely recorded and passed on. The key issue is to analyze the chain of title to determine whether the release or reconveyance was recorded in connection with a refinance. If your search reveals a recent mortgage or deed of trust that has been purportedly paid off without a new refinance transaction, further investigation without the borrower’s assistance must be conducted to determine the true status of the so-called “released or reconveyed” lien.
The sophistication of fraud and forgery transactions can never be underestimated. The parties committing such crimes have educated themselves of lender, title and escrow practices and procedures. These criminals will look for the weakest link in the process in their efforts to literally walk away with millions of dollars. Over the past year, WFG has had three separate claims involving essentially the same behind the scenes parties. The losses in the three claims exceed $2 million. These same parties are responsible for millions of dollars in losses for other insurers.
The culprits use different names in order to disguise the transaction. The common theme has been that a high-priced property is in foreclosure for a lengthy period of time (more than a year). The owner/borrower has been attempting a work-out with the lender which results in rescission of the default. Within a short period of time, the borrower is again in default and the foreclosure proceeds. At the foreclosure sale, the property is acquired by a third party, who in one case, immediately sells the property to a new buyer for $1.3 million which is insured by WFG. A month later, the new buyer obtains a hard money loan for $850,000 which is also insured by WFG.
As it turned out, the foreclosure was fraudulent. The recorded foreclosure documents were all forged to appear to have been prepared by the foreclosing trustee. The original lender’s foreclosure was still pending. The insured lender sought reimbursement for a full policy loss.
There were adequate flags in the transaction that could have stopped the transaction – e.g., (1) the amount of the bid at the sale was for approximately the same amount that the property was subsequently sold for; (2) the buyer was a 21 year old with a foreign name; and (3) the hard money loan was obtained after the acquisition.
The variations in the three claims were subtle enough that they were not linked to one another and were spread out over a lengthy period. Each of the claims was a fraudulent scheme. In each instance, flags were present that if further investigated would have possibly detected the fraudulent scheme.
The key to prevention is paying attention to possible problem flags in the transaction. Your gut feeling that something isn’t quite right should always be explored. Criminals seek to utilize weaknesses in our processes and exploit them for their gain. One of our major weaknesses is our desire to close transactions faster than our competition; which can often lead to carelessness. “Be quick, but don’t hurry” is what UCLA’s Coach John Wooden would teach. We can learn much from that credo.
By – Jeffrey S. Leung, Senior Vice President – National Claims Manager, WFG National Title Insurance Company