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In re: Pennsylvania Title Insurance Antitrust

November 30, 2010


The opinion of the court was delivered by: Yohn, J.



Plaintiffs, purchasers of title insurance in Pennsylvania, have filed this action alleging antitrust violations by various title insurance companies ("the Insurers") and the Title Insurance Rating Bureau of Pennsylvania ("TIRBOP") arising out of a conspiracy to fix rates for title insurance purchased in Pennsylvania.*fn1 This suit began as a series of separate class actions by named plaintiffs against various defendants. Pursuant to an order from this court consolidating these actions, plaintiffs filed a consolidated complaint that raises one claim for violation of § 1 of the Sherman Act (15 U.S.C. § 1 (2006)). Presently before the court is defendants' motion for summary judgment. Defendants argue that they are immune from antitrust liability because the Insurers' collective rate filings through TIRBOP (1) constituted state action because they were authorized by a clearly articulated state policy and were actively supervised by a state agency; and (2) were covered by the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), which exempts the business of insurance from federal antitrust laws to the extent that such business is regulated by state law. I conclude as a matter of law that defendants' collective rate filings constitute state action outside the scope of the Sherman Act and will therefore grant summary judgment to defendants. Because my resolution of the state action 2009. See In re Pa. Title Ins. Litig., 648 F. Supp. 2d 663, 690 (E.D. Pa. 2009).

issue is dispositive of plaintiffs' claims, I do not reach the question of whether the McCarran-Ferguson Act also exempts defendants from liability under the Sherman Act.

I. Facts and Procedural Background

Discovery so far has been limited to issues relevant to the state action doctrine and McCarran Act defenses. (See Scheduling Order (Doc. # 137), Aug. 24, 2009.) In order to provide necessary background, I also draw facts from plaintiffs' Consolidated Complaint ("CC"). As is appropriate on a motion for summary judgment, I view any disputed facts in the light most favorable to the plaintiffs.

A. Parties

The named plaintiffs are all Pennsylvania residents who purchased title insurance directly from one of the defendants and, allegedly, have been injured as a result of defendants' collective rate-filing practices. They bring this class action on behalf of all purchasers of title insurance on property in Pennsylvania from one of the Insurers on or after March 11, 2004. (CC ¶ 27.)

The Insurers are title insurance companies doing business in Pennsylvania. Together, the Insurers control over 97% of the market for title insurance in Pennsylvania. (Id. ¶ 35.) The Insurers are not all under the same general management or control. (Plaintiffs' Counterstatement of Material Facts ("PCS") ¶ 39.) All Insurers file rate proposals with the Pennsylvania Department of Insurance ("DOI") through TIRBOP, a voluntary association of title insurers also named as a defendant in this action. (CC ¶¶ 22, 24.)

B. Title Insurance and the Title Insurance Industry

Title insurance protects homebuyers and mortgagors against losses arising out of defects in title that existed at the time of the sale or mortgage. Before a title insurer issues a policy, a title insurance agent, independent attorney, or employee of the title insurance company must search and examine public records in order to identify any potential defects, such as liens or encumbrances. See

40 Pa. Stat. Ann. § 910-7. In general, any significant defects that the examination reveals will be excluded from the policy. (CC ¶ 2.) As a result, "the title insurer's function is primarily to prevent losses by reducing the insured's ignorance of the state of title to the lowest possible level, and only secondarily to pay losses when some element of ignorance has not been eliminated" by the title search and examination. (See Plaintiffs' Response to Defendants' Statement of Undisputed Facts ("PRDS") Ex. 13, at 6 (Apr. 17, 2009, letter from Ronald Chronister to Chuck Romberger (quoting Nelson R. Lipshutz, The Regulatory Economics of Title Insurance (1994))).) The policy buyer makes a one-time payment for coverage that lasts as long as the buyer retains an interest in the property. (See DS ¶ 78.)*fn2 The amount of the premium does not generally vary according to the likelihood of a loss or the cost of performing the title search or examination but rather varies according to the value of the property to be insured or, when the insured is a mortgagor, according to the amount of the mortgage. (CC ¶ 37.)

In Pennsylvania, title insurance premium rates are regulated by the Department of Insurance as required by the Pennsylvania Title Insurance Act (the "Act"), 40 Pa. Stat. Ann. §§ 910-1 to 910-54. Each title insurance company doing business in Pennsylvania is required to file with DOI a schedule of rates it plans to charge purchasers. 40 Pa. Stat. Ann. § 910-37(a). A title insurance company may satisfy this filing obligation by becoming a member of, or a subscriber to, a licensed rating organization such as TIRBOP and by authorizing the organization to submit rate filings on its behalf. Id. §§ 910-37(b), 910-41. (See DS ¶¶ 1-3.) The Insurers have all opted to submit their rate filings through TIRBOP. (CC ¶ 21.) As a result, they all use the same schedule of rates. (Id.)

Each title insurer or rating organization that submits a rate filing to DOI must also provide a statement explaining the economic basis for the proposed rate. 40 Pa. Stat. Ann. § 910-38. DOI is required to review each filing to ensure compliance with the Act's standards for appropriate title insurance rates, including the Act's requirement that rates not be "inadequate" or "excessive" and that they permit title insurers to earn a "reasonable profit." Id. §§ 910-39(b), 910-37(c). Any rate that becomes effective shall be "deemed to meet" these requirements. Id. § 910-37(e). Typically, any rate filing becomes effective upon agency approval or within thirty days of filing, unless specifically disapproved by DOI. Id. § 910-37(d). The thirty-day waiting period may be extended once upon notice to the party making the rate filing and may be extended further with the consent of the party submitting the filing. Id. An individual title insurer must charge rates in accordance with those filed and approved by the DOI. Id. § 910-37(h).

C. Title Agent Commissions

Title insurance presents a unique regulatory challenge to the DOI in that a comparatively small portion of each title insurance premium goes toward paying eventual claims, while approximately 82% of each premium is paid as a commission to the title agent or attorney who conducted the title search and examination. (PCS ¶¶ 6, 35; Defendants' Statement of Undisputed Facts in Supp. of Mot. Summ. J. ("DS") Ex. NN; Pls.' Ex. 13, at 6-7.) In contrast, in other insurance industries, the agent's commission is around 10-15%. (PCS ¶ 8.) This is because, unlike most lines of insurance in which "the risk insured is grounded in the uncertainty of the future," title insurance protects only against losses arising out of defects in the title existing at the time of closing, most of which can be identified and either remedied or excluded before issuing a policy. (PCS ¶ 34; Pls.' Ex. 13, at 5-7; CC ¶ 2.) As a result, the "loss ratio in title insurance is exceedingly low." (PCS ¶ 35 (quoting Pls.' Ex. 2, at 121 (hearing testimony of Ron Chronister)).) Title insurers also pay comparatively high commissions to title agents in part because it is the title agent who performs the title search and examination and in part, according to plaintiffs, because title insurers provide agents with inducements and kickbacks in exchange for customer referrals. (CC ¶¶ 41, 42.)

Because title insurance agent commissions form the bulk of title insurance rates, plaintiffs assert that DOI must regulate the agent commissions component of those rates in order to regulate the rates effectively. (PCS ¶ 36.) In its regulation of other insurance industries, however, DOI typically does not review agent commissions to determine whether they are reasonable. (PCS ¶ 9.) Although the DOI has, since 2000, received yearly analyses of TIRBOP's economic data conducted by Dr. Lipshutz of the Regulatory Research Corporation (see DS ¶ 67), plaintiffs argue that the data contained in these reports do not permit any meaningful analysis of title insurance agent commissions (see PRDS ¶ 67; Pls.' Ex. 15 (statistical analysis by Dr. Lipshutz analyzing title insurance costs and revenue, with no breakdown of title agent commissions)).*fn3

D. TIRBOP's Most Recent Rate Filing

On February 2, 2009, TIRBOP submitted a rate proposal to DOI that sought to: (1) simplify the rate structure for title insurance policies, (2) propose a new form Closing Service Letter ("CSL") that would expand title insurance protection to cover the purchaser or lessee of real property-as opposed to only the lender-and raise the price of the CSL from $35 to $75; and (3) increase rates for policies above $30 million. (DS ¶ 7, id. Ex. B.) TIRBOP characterized the rate structure simplification as "revenue-neutral" as it was not expected to increase or decrease the industry's profitability. (DS Ex. B, at 2.) The rate increases for high-value policies, on the other hand, were intended to increase revenue for the industry, which TIRBOP characterized as increasingly unprofitable, in light of changed economic conditions. (Id. at 3-4.) TIRBOP justified the CSL price increase both in terms of the need to increase profitability and the need to offset the extra risk that insurers would assume under the new form CSL. (Id.)

DOI extended the review period for TIRBOP's filing by thirty days and posted a notice in the Pennsylvania Bulletin requesting public comments on TIRBOP's proposal. (DS ¶¶ 9-10.) On March 16, 2009, Pennsylvania's Office of the Attorney General ("OAG") submitted objections to TIRBOP's rate filing. (DS ¶ 11.) OAG primarily argued that title insurance agent commissions were excessive in comparison to the commissions that other kinds of insurance agents earned and that the industry should lower its rates by reining in its commissions-related expenses. (Id.) Moreover, although TIRBOP justified its need for a rate increase in part based on increases in mortgage fraud, the Attorney General argued that such fraud did not actually increase risk to title insurers. (DS Ex. E (OAG Letter), at 2.) On March 18, 2009, DOI forwarded OAG's objections to TIRBOP and requested that TIRBOP consent to a sixty-day extension of the review period. (DS ¶ 14; PCS ¶ 20; DS Ex. E.) TIRBOP consented to the extension on March 27, 2009.

In late March, 2009, representatives of TIRBOP and DOI began meeting with each other to discuss how to proceed on TIRBOP's rate filing in light of OAG's objections. (PCS ¶ 21.) In a March 23, 2009, meeting, counsel for TIRBOP told DOI that, due to potential antitrust implications, they would "never recommend" that DOI simply allow the rate to "deem" into effect by allowing the review period to elapse without DOI taking action. (PCS ¶ 22.)*fn4

On March 26, 2009, Christopher Doane, General Counsel of DOI, emailed Department Counsel Amy Daubert, stating that he had "everything figured out" and suggesting that DOI "move ahead with an informational hearing on title issues (including the AG's letter) without worrying about the pending [TIRBOP] filing." (PCS ¶ 23; Pls.' Ex. 7.) That same day, Doane met with Kevin Brobson, attorney for TIRBOP, and "explained that [DOI was] not intending to hold [an] adversarial hearing to disapprove [the] filing at this point (though everything is on the table)" but that DOI "would be hard pressed to affirmatively approve [the filing] unless and until [there] was a public forum for the AG to vent their concerns (probably public info hearing on broader title issues - not just filing)." (PCS ¶ 24; Pls.' Ex. 8, at 1.) Doane further stated that, "short of [the] AG publicly retracting [its] comments," he did not "see any other way" that the filing could be affirmatively approved "unless [a] public hearing took place within [the] next 60 days." (Id.) Brobson informed Doane that he planned to meet with OAG in order to attempt to persuade it to retract its opposition to the rate increase in order to avoid the need for a hearing. (Id. at 2.) Doane advised Brobson to "be circumspect & not mention any of our informal discussions" to OAG. (Id.) On April 16, 2009, TIRBOP representatives met again with DOI and discussed TIRBOP's meeting with OAG and TIRBOP's responses to OAG's criticisms. (PCS ¶ 26.)

On April 17, 2009, TIRBOP sent DOI a written response to OAG's objections. (DS ¶¶ 12-13; DS Ex. F.) TIRBOP repeated that its rate simplification proposal was revenue-neutral. (DS Ex. F, at 1.) It further emphasized that only the rate increase for policies above $30 million, and not the rate


Ticor Title Ins. Co. ("Ticor II"), 504 U.S. 621 (1992), the Supreme Court held that "state action" immunity was unavailable to title insurers that collectively submitted rate filings to the state agency because those filings had gone into effect despite the agency's failure to perform any substantial review.

increase for the CSL, was "subject to agent's commission retention." (Id. at 3.) Finally, TIRBOP discussed the economic merits of OAG's objections and argued, inter alia, that title insurance agents performed substantially different functions than other insurance agents, in particular the title search and examination, which justified the higher commission rates they received. TIRBOP also argued that mortgage fraud had led to an increase in title insurance losses and that, in fact, "mortgage fraud is one of the major causes of title insurance losses." (Id. at 6-10.) Finally, TIRBOP noted that, in its objections, "[t]he OAG is not questioning the merit of the current filing; rather, the OAG seems to be questioning generally whether the commissions paid to title agents are reasonable within the context of the services provided by the title agents." (Id. at 10.) As a result, TIRBOP suggested that DOI consider OAG's objections "separately from its review of the rate filing." (Id. at 11.)

In another letter dated April 17, 2009, TIRBOP sent to DOI a written response to comments that DOI had received from Diane Cipa, a licensed title insurance agent, who also opposed the rate changes. (DS ¶¶ 15-16; DS Ex. I.) TIRBOP argued that Cipa's comments, which largely concerned misconduct and negligence by title agents that caused an increased risk of losses to insurers, were not relevant to TIRBOP's filing because Cipa did not recommend any solution to reduce those losses short of legislative action. (DS Ex. I.)*fn5

On May 14, 2009, DOI and TIRBOP met again to discuss the upcoming hearing. DOI and TIRBOP discussed the anticipated testimony of representatives from TIRBOP, the American Land Title Association ("ALTA"), and the Pennsylvania Land Title Association ("PLTA"), and the anticipated remarks of various DOI officials. (See PCS ΒΆ 27; Pls.' Ex. 10.) In particular, it was proposed that TIRBOP's general counsel, Ron Chronister, speak for approximately ten minutes and that Dr. Lipshutz, who performs yearly analyses of TIRBOP's statistical data, speak on other topics such as the general health of the title insurance industry. (Pls.' Ex. 10, at 1.) DOI and TIRBOP discussed the basic points these proposed witnesses would make, most ...

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