Although commonplace in the title insurance industry, reinsurance is a concept which is frequently misunderstood. When confronted with the idea that the title insurance company selected to write a policy is in fact sharing the risk with its competitors (i.e. other title insurance companies), it is no wonder that people become confounded and perplexed with reinsurance. In this "dog eat dog" world of fierce competition, it is strange to consider rival title insurance companies working together, hand in hand, to help insure a real estate transaction. However, without this spirit of cooperation, it would be virtually impossible for a large-scale title insurance policy risk to be undertaken.

In a nutshell, reinsurance is a contract in which the reinsurer agrees to indemnify the company issuing the title insurance policy either in whole or in part against loss or liability which the policy-issuing company may sustain under the title insurance policy. The reinsurer assumes its share of the risk for a pre-determined compensation. The policy-issuing company retains a portion of the liability, known as the "primary retention," and transfers to the reinsurer(s), either in whole or on a pro rata basis, liability for payment of a claim above this amount. Reinsurance evolved for three (3) basic reasons: (1) the insured party wants to have only one policy issued for the entire amount of the transaction; (2) state statutes dictate the amount of risk that a title insurance company may retain on a single title insurance policy; and (3) companies want to minimize the risk that capital will be impaired by one large claim. The external constraints of statutory limits means that no one title insurance company could insure the entire risk on certain large title insurance policies, and since some companies self-impose a primary retention that is lower than the applicable state imposed limit, reinsurance is utilized more often than most insureds realize.

There are two (2) types of reinsurance agreements: Facultative and Automatic Treaty Agreements. In a Facultative Agreement, the title insurance company issuing the policy sends an offer of reinsurance typically called an "offer" letter to other title insurance companies. Title insurance companies keep track of the amount of risk other title insurance companies are willing and/or able to accept and in which states a title insurance company is permitted to accept reinsurance. From this list, an "offer" letter may be effectively written and sent to the appropriate reinsurer(s). In the "offer" letter, the policy-issuing company will describe the real estate transaction and any particular risks associated with issuance of the policy. It is common for an "offer" letter to contain information on the type of policy and endorsements to be issued. It is customary for the reinsurer(s) to send an "acceptance" letter to the policy-issuing company [see: Exhibit A]. Customarily, the Facultative Agreement is not signed until after the final policy is issued.

Unlike the Facultative Agreement type of reinsurance, the Automatic Treaty Agreement does not usually require a notification procedure such as an "offer" letter, barring any extra-hazardous risks in the real estate transaction. Instead, under an Automatic Treaty Agreement, the policy-issuing company has the authority to bind the reinsurer up to a specific contractual limit. Automatic Treaty Agreements are generally between only two (2) title insurance companies and no additional agreement is signed; however, a reinsurance certificate may be attached to the final policy as confirmation that the Automatic Treaty Agreement is in full force and effect.

Common extra-hazardous risks on the real property that might affect the cost and availability of reinsurance include the following: known Indian claims; title transferred out of a criminal forfeiture; deletion of the creditor rights provision from the ALTA 1992 Loan Policy; mineral leasehold policies; insurance over mechanics' and materialmen's liens where priority does not exist; tidal line changes; insuring title to water, wetlands, tidelands, or submerged lands; and bond holder policies.

Due to standard reinsurance forms in use by the title insurance industry, the insured party has an added advantage if a title claim should arise – Direct Access. The ALTA 1990 Facultative Reinsurance Agreement provides direct access for the insured to both the policy-issuing company and the reinsurance company if a claim is filed. However, direct access is not automatically given in all reinsurance agreements; it is to the insured's benefit to determine if a direct access provision is present in the agreement between the insured's title insurance company and the reinsurer.

In the unfortunate event of a claim, an insured party should be relieved to know that their interest in the title insurance policy is in the care of both the policy-issuing company and the reinsurer. Without the availability of reinsurance, transactions such as the Sears Tower and the Bank of America Building would not be able to be underwritten as the risk would be too great for a single title insurance company to bear. Through reinsurance, almost no title risk is too great to be borne --- and most importantly, the insured's interest is more thoroughly protected.