With most situations involving title insurance, the underwriter issues a policy in the full amount of the transaction and is therefore liable for that full amount. For example, XYZ Title Insurance Company issues a $10,000,000 Owner’s Policy – in the event of a total title loss/claim, XYZ would be liable for the full $10,000,000.
But what happens when the amount of requested insurance exceeds an underwriter’s limit or the insured wants the security of multiple underwriters? This is where Coinsurance and Reinsurance come into play.
Coinsurance occurs when two or more title insurance underwriters proportionally insure a given transaction via separate title policies. The amount of risk is shared in proportion with their policy amount. For example, on a $10,000,000 transaction both ABC Title Insurance Company and XYZ Title Insurance Company issue separate policies for $5,000,000 each (totaling $10MM). Each underwriter would therefore commit to 50% of any claims arising from the policy (as $5M/$10M is 50%). It is possible for one underwriter to carry more of the liability than the other and therefore share in a higher percentage of the liability.
Some states provide for “Me Too” or Alta 23/CLTA 114 endorsements as a means to tie the policies together. Florida does not authorize these endorsements (they may not be issued), instead, Florida policies should contain a clause similar to:
“This Policy is being issued with (Title Insurance Company) Policy Number ___ in the amount of $____. While both policies total $_____, it is understood and agreed that the Company is only liable for ___% and not to exceed the face amount of this Policy.”
Keys to Coinsurance:
- Each underwriter issues separate policies for their amount of the liability (not for the total amount of coverage). Therefore, the sum of the underwriter policies would equal the total transaction/coverage amount.
- The Liability of the transaction is determined by the proportion of insurance. A $2,000,000 coinsurance policy on a $10,000,000 total amount of coverage would be responsible for 20% of the claims/liability.
- Other states issue “Me Too” and CLTA 114/ALTA 23 Endorsements – Florida does not. Florida utilizes a clause in the policy stating that it is a portion of the coinsurance.
- Coinsurance rates are typically the same as the original/promulgated rates – starting at dollar zero.
Reinsurance occurs when an underwriter (or insured) wishes to share some of the policy’s liability with another underwriter. While the original underwriter will write the policy for the full amount of the transaction, they’ll purchase reinsurance for claims arising from a certain dollar amount from another underwriter.
A Reinsurance Example
An insured requires $50,000,000 worth of coverage from ABC Title Insurance Company, its underwriter. ABC is only authorized by the State of Florida to issue policies up to $14,000,000. ABC goes to XYZ Underwriter and purchases Reinsurance from them for the liability of $14,000,000 to $50,000,000. ABC writes the $50,000,000 policy (as reinsured by XYZ) but is only liable for claims $14,000,000 and below – claims exceeding $14MM would be picked up by XYZ.
Keys to Reinsurance
- The original underwriter (aka the “ceder”) issues a policy for the full amount of the transaction/coverage.
- The ceder sends an offer letter to other underwriters to get pricing for reinsurance (providing the transaction specifics).
- The ceder buys reinsurance from another underwriter (the “reinsurer”) for liability over a certain amount, keeping the primary retention amount and pushing the liability in excess of this amount to the reinsurer.
- Rates vary based on amounts and determined risks. An underwriter’s reissue department typically negotiates the rate and drafts the reinsurance agreement.
In larger transactions it is possible to have both coinsurance and reinsurance. The goal of both is to spread the liability of large transactions across multiple underwriters, to hedge against the unlikely event of a catastrophic loss.
Have you worked a Coinsurance/Reinsurance transaction? What were the challenges you faces? Share your experiences in our comments section.