Insurance is one of those necessary evils; we know we need it, but it often seems like a waste of money.
The Oxford Dictionary definition of insurance is, “a thing protecting against a possible eventuality.” The keyword here is “eventuality,” something that will eventually happen in the future.
Homeowners’ insurance is built into the mortgage and makes sense because it protects our home and valuables. We pay our monthly medical insurance because we understand that this saves us when we get sick. We pony up for auto insurance because we’ve all been there and had that fender bender. Then you have title insurance, which is a bit more confusing and complex.
What is Title Insurance?
It seems fair and reasonable to protect yourself from possible eventuality on the surface. However, it’s tricky to understand which eventuality is being protected when you peel the onion. The insurance industry will quickly explain that title insurance protects against possible eventuality if an error is found in the title.
For example, let’s say you and a friend, let’s call him Harry, go out to lunch. The bill arrives, and the amount with the tip comes to $22. You agree to put it on your credit card, and Harry gives you a ten-dollar bill and a one-dollar bill.
A week later, you go out to lunch with your friend Mary. You pull out the same ten-dollar bill and the one-dollar bill that Harry gave you last week. Inexplicably, the lunch with tip comes to $22. Mary offers to put this on her credit card. You pass the same money Harry gave to you last week to Mary to cover your half of the bill.
You didn’t feel compelled to take out insurance on those bills to make sure they weren’t fake or to protect you from errors and omissions in the recording of the transaction. The question is, why do you need to purchase title insurance for the same type of protection?
With the need for change in the title insurance industry, there is a clear need for technology to automate claims functions and streamline the flow of information on a shared ledger. That’s where blockchain enters the picture.
Blockchain has the potential to help make land record searches faster and more efficient by associating records relative to each property. Blockchain could decrease title insurance costs resulting in an overall change in the industry.
Blockchain as a Technology
A blockchain is a database that manages a digital record of transactions. The individual transactions are known as “blocks” that are “chained” together within a single list.
In the new era of cryptocurrency, the term blockchain is well-known for recording transactions, such as Ethereum smart contract execution and Bitcoin.
“What started as a product for building games on the blockchain and offering a solution for portability of in-game purchases across platforms has grown into a product supporting industries. These industries range from cybersecurity, crypto, blockchain, insurance, and supply chain management to content creator royalty protections,” explained Nick Donarski, Founder and CTO of Ore Systems, named one of the top ten blockchain solutions providers in 2022.
The principles of cryptography, decentralization, and consensus, which ensure trust in transactions, make blockchain a perfect candidate to digitize titles. While multiple computers verify blockchain transactions via the internet, the need for the centralized recording of transactions is all but eliminated.
Will Blockchain be the Death Knell of Title Insurance?
Blockchain would change many aspects of the title insurance industry for the better:
• Added security
• Supports small contracts
• Improves record-keeping
• Improved efficiency
• Saves money
How, and if, blockchain will be permitted to be utilized in the title insurance industry remains to be seen. Outside of finance, the title industry is the largest and most powerful lobby in the mortgage industry and comes in number two in money spent on lobbying, just under big pharma.
The jury is out whether or not innovation will prevail over money, power, and the clout of the insurance companies. We will have to wait and see if blockchain technology will be allowed to create positive change in the title insurance industry.
The author, Yatin Karnik, is the founder and CEO of Confer, Inc. After 18 years in the Home Lending industry with Wells Fargo Home Mortgage as a Senior Vice President, Yatin Karnik realized that home buyers and those looking to refinance existing mortgages needed a solution to democratize mortgages and simply get a better deal.
