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Five Things Every Home Buyer Should Know About Title Insurance
Title insurance has become a popular tool for purchasers and lenders to mitigate against certain risks associated with transactions involving real estate. Prior to the establishment of title insurance in the Canadian real estate market nearly twenty years ago, solicitors provided an opinion to purchasers and lenders with respect to the title of the subject property.
This required numerous “off-title” searches to be done and an up-to-date survey of the property to be prepared by a surveyor. Title insurance provides coverage for defects that would otherwise be revealed by these searches and a survey, and thereby provides a cost-effective alternative to an opinion. In some cases title insurance may reduce the legal fees in a transaction from thousands of dollars, to hundreds of dollars. Nevertheless, title insurance does not provide coverage for all matters of title and policy-holders should understand the limits of their policy. This article will address five common concerns of title insurance policies.
1. What is title insurance and why do purchasers/lenders need it?
Title insurance, like its name suggests, is insurance which guards against the risk of certain defects in title to property. Title insurance differs from traditional insurance products in that, rather than providing coverage for future events, coverage is provided for issues that were not apparent at the time of the transaction but are later revealed. When an individual purchases real estate with bank financing (i.e. a mortgage) typically two title insurance policies are obtained: (1) an owner policy which protects the purchaser from various title-related losses; and (2) a lender policy which protects the lender in the event the mortgage is invalid or unenforceable. The policies are mutually exclusive; an owner may not claim under the lender policy and vice versa. Typically lender policies are more comprehensive with fewer exclusions as the risk associated with an unenforceable or deficient mortgage is lower.
2. What is the value of a title insurance policy and how long is it valid?
The policy amount is usually equivalent to the purchase price of the property. Most policies are tied to the market so the face value of the policy will increase with the value of the property. Usually there is a cap however of 200% (double) increase in the value of the property for an owner’s policy and 125% for the lender’s policy. The owner policy protects the owner for as long as they own the property and the lender’s policy will be valid for as long as there is a balance owing on the mortgage.
3. What issues does title insurance cover and what does it not cover?
Coverage varies slightly among insurers but most will provide coverage for defects in title such as another person claiming an ownership interest in your land, undischarged mortgages and previous fraudulent conveyances. Coverage is also typically provided for compliance defects such as the breach of a zoning by-law, the absence of approval from a conservation authority for the existing residential structure, the absence of a building permit for the existing residential structure, encroachments onto neighbouring properties, etc. Access defects such as the absence of a legal right of access to and from the property and the invalidity of a right-of-way or easement benefiting the property are also covered under most policies.
Title insurance policies will not provide coverage for some issues such as non-potable drinking water or environmental matters.
4. Can known defects at the time of purchase be insured against?
It depends. The defect must be disclosed to the title insurer and the title insurer will decide whether they are willing to take on the risk of the potential financial loss. If the title insurer is willing to “insure over” the issue, then the known defect will be excepted from the standard coverage and an “endorsement” will be added to provide the specific coverage required. This allows the policy to specifically address the known defect, and control the insurer’s exposure in the event there is a claim.
5. Does title insurance provide coverage for issues that arise after the purchase (i.e. not issues that existed at the time of purchase but were undiscoverable)?
Yes. More and more, title insurance policies are including coverage for fraudulent transfers or mortgages that occur post-purchase. For example, if someone assumes your identity and sells your house without your knowledge then this is covered in most policies. Most policies also provide coverage for encroachments constructed on your property by a neighbour.
Purchasers should understand that while useful and cost-effective in many cases, title insurance is not a magic bullet for all issues associated with transactions involving real estate. There may be situations where it is advisable for the lawyer to nevertheless perform a search even though the issue would otherwise be covered by the policy; and in fact, the title insurer may require it. Furthermore, a title insurance policy will only provide a monetary remedy to a defect, which may not be an adequate solution. Purchasers need to ensure they understand the coverage their title insurance policy is providing and its limits and lawyers have a duty to confirm this knowledge to their clients.