Drilling Down Into the Differences Between

Attorney Opinion Letters and Title Insurance

Last year, the Biden Administration released a plan aimed at lowering housing costs that included a pilot to waive title insurance on certain refinances. The GSEs also announced that they are both now under limited circumstances accepting written Attorney Opinion Letters (AOLs) in lieu of a full title insurance policy. While on the surface AOLs may appear as a cost-saving option, they come with risks that make title insurance the more comprehensive and reliable choice.

Title Insurance’s Beginnings
Ever hear the expression, everything old is new again? That’s the case with AOLs. These letters were once the primary method to address title risks in real estate transactions. Attorneys would issue an opinion on the status of the title after reviewing available public records, but if an error was made, the burden of rectification fell on the property owner. Recovering from the attorney required costly lawsuits to pursue malpractice claims with no guarantee of success.

Today’s modern title insurance evolved to address these inadequacies. Unlike AOLs, title insurance provides indemnification against a broad range of covered risks, ensuring both lenders and property owners are protected.  Title insurance has effectively mitigated lenders’ risk.  In contrast, by providing more limited coverage, AOLs represent a shifting of risk to the lender.   

Key Differences

1. Coverage Beyond Public Records: Title insurance offers protection for risk that may or may not appear in public records, and approximately 30% of claims are the result of issues not found in public records, according to ALTA. Some of the most common examples include:

• Unindexed federal tax liens
• Hidden HOA liens
• Boundary disputes
• Fraud

AOLs are limited to risks identified in public records, leaving significant gaps in coverage.

2. Claims and Defense Coverage: Title insurance provides direct insurance for covered claims, typically up to the policy limits, which correspond to the property or loan value. This coverage includes appointing counsel and the cost of defense. In contrast, AOLs rely on attorney Errors and Omissions (E&O) insurance, which often requires exhausting all other recovery options before a claim can be pursued. AOLs do not cover the cost of defense, or at best, only a limited amount.
   
   
3. Flexibility with Endorsements: Title insurance policies can be customized with endorsements to address specific risks in residential or commercial transactions, such as protections from survey issues, any liens filed by contractors, or zoning issues. This flexibility is absent in AOLs, limiting their ability to adapt to unique circumstances.
   
   
4. Reserves: Title insurance providers are licensed by states and required to maintain adequate reserves to pay claims, ensuring financial stability. They are also rated by credit rating agencies that continually monitor their claims-paying ability. AOL providers are not licensed as title insurance providers. As a result, they do not maintain the high reserve requirements required of title insurers. This could leave property owners and lenders exposed.
   
   
5. Cost: Proponents of AOLs argue that they are beneficial to lenders because they are cheaper than title insurance. However, given that the cost of title insurance varies greatly depending on the size and location of the transaction, no broad national comparison of pricing has been conducted to back up the cost savings claim by AOL providers. Moreover, as the cost of AOLs are based on flat fees, the cost savings may be more pronounced on larger transactions which typically involve borrowers better positioned to pay the higher costs.  Considering the significant additional risks associated with AOLs, the modest savings may not justify the potential liabilities.

While some tout AOLs as a way to reduce housing costs, the reality is that title insurance is a small fraction of total closing costs and not a real barrier to homeownership. Addressing the real issues, like the nationwide shortage of affordable homes, and high interest rates, would have a far greater impact on affordability than eliminating a protection as critical as title insurance.

When it comes to protecting property ownership and reducing risk, title insurance stands out as the superior option. Its broader coverage, financial backing and legal defense make it indispensable in real estate transactions. Choosing title insurance isn’t just about mitigating risk; it’s about ensuring peace of mind for buyers, lenders and the entire real estate ecosystem.