K.E.L. takeover leads to fee for title insurance policies

April 02--Coming soon to a home-sale closing near you: A small fee tacked onto all title insurance policies to pay for the multimillion-dollar collapse of an Orlando title company.

More than a year after the state took over the floundering K.E.L. Title Insurance Group, policy claims are skyrocketing and its cash is nearly gone. The state plans to pass those costs onto consumers and businesses when they buy title insurance.

This year alone, regulators expect to deal with a projected $2 million shortfall by effectively imposing fees on every title policy sold in Florida, according to documents filed in the case.

K.E.L. Title's court-appointed receiver has asked for "the authority to continue to request assessments on an annual basis, until no more policies of the title insurer are in force or the potential future liability has been satisfied," the state said in a court filing earlier this year.

Observers say it is a vexing turn in the case of K.E.L. Title, formerly owned by partners of the KEL law firm in Orlando.

The amount of the fee is still being tallied, but it is expected to be about $2 to $3 per policy. Despite the small amount, critics still question why the public should bail out the failed insurer while the partners continue to run other title and real-estate operations.

"To me, you have to wonder why consumers should pay for their mistakes," said Linda Streetman, a real estate agent with Keller Williams Realty in Orlando. "And it looks like they're not being held responsible at all."

The law partners -- Jeffrey S. Kaufman, Matt Englett and Craig Lynd -- would not comment on the latest news. They have denied any wrongdoing, blaming K.E.L. Title's problems on a fraud scheme by an unidentified rogue agent in South Florida who allegedly fabricated sales and stole escrow money. They said they notified the state about K.E.L.'s exposure to the fraud and requested the company be taken into receivership.

K.E.L. Title's claims soared as homeowners discovered flawed sales closings and bogus title insurance sales. When the state took over in October 2012, K.E.L. had claim liabilities of $12.8 million and cash of $2.7 million, according to state records.

Florida law requires homeowners to buy title insurance, which guarantees the ownership of the property is free and clear. If a problem occurs with the title or any other part of the closing, title insurers are liable to cover the resulting claim.

Florida officials are still investigating to find out what happened, a spokeswoman for the Florida Department of Financial Services said. If investigators determine the problems were caused by impropriety, the state could sue the owners or other parties for damages, regulators say.

Insurance experts said a thorough audit by K.E.L. Title's management would likely have detected -- and certainly discouraged -- the improper account activity.

"I suspect K.E.L. was duped in this case," said Joseph Petrelli, president of Ohio-based Demotech Inc., an insurance ratings firm. "Unless you are monitoring your cash flows and reconciling accounts on a regular basis, an embezzlement is almost impossible to detect."

Demotech estimated the fee at $2 to $3 per policy, based on the number of title insurance policies sold in Florida last year.

K.E.L. Title is the first Orlando title insurer to go into receivership and only the fourth statewide, state records show.

Title industry officials said such cases are rare in Florida -- only two surcharges are being processed by the Office of Insurance Regulation, involving K.E.L. and National Title Insurance Co. Both are expected to be imposed this summer, according to the Florida Land Title Association.

Jeff Stein, an Oviedo-based executive with Alliant National Title Insurance Co., said the state's title insurers work with regulators to impose such fees on a case-by-case basis to protect policyholders from losing their coverage when insurers fail.

He noted that property-and-casualty insurers charge their customers on an ongoing basis to build a guaranty fund that covers such default losses.

"I know it is frustrating for people to see that they are paying for somebody else's apparent wrongdoing, but ultimately they are paying a very, very small amount," said Stein, an underwriting expert for the Florida Land Title Association. "We think this approach does protect consumers against their policies disappearing when a business fails."

The failure of K.E.L. Title was not the first title-industry problem for Kaufman, Englett and Lynd. Regulators suspended the license of their title policy sales unit -- K.E.L. Title Insurance Agency Inc. -- two years ago after a series of claims involving botched closings. The partners denied any wrongdoing and said they gave up the license to settle the allegations and avoid more legal expenses.

Real-estate expert Joshua Harris said there are inherent problems when the same group owns both a title insurance underwriter and a sales agency. The pressure to pump up a high sales volume, for example, can drown out more cautious underwriting standards, said the University of Central Florida real estate professor.

"That kind of structure is fraught with risk," he said. "I would think it is not a good business model, especially for a law firm, and for the title business in general."

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