Real Estate Title Insurance
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Definition
Title insurance companies provide insurance for buyers and mortgage lenders against several kinds of title risks that can affect real estate trades including survey errors, legal description errors, negligence, forgery, liens and other encumbrances. Many lawyers now prefer their home buyer clients take out title insurance according to an industry survey[1]; however, the benefits of such insurance vary considerably from province to province because of significant differences in title registration systems (see next section).
While title insurance represents one more cost burden for closing, there may be some cost savings enjoyed because title insurance was purchased. For example, if you were an Ontario resident you would not need to pay for these otherwise required expenses:
- Zoning compliance certificate
- Tax certificate
- Certificates from various utilities companies, such as electricity, water and gas
- Law Society levy
This cost savings can amount to between one half to two thirds of the title insurance cost, depending on the title insurance provider and the area involved. Presently, title insurance cost is about $300.
Differences Between Provinces
The Western provinces[2] operate under a Torrens title system[3]. This reduces the need for title insurance. From the Wikipedia link:
"The Torrens title system operates on the principle of title by registration (i.e. the indefeasibility of a registered interest) rather than registration of title. The system does away with the need for a chain of title (i.e. tracing title through a series of documents). Each parcel of land is given a separate folio in the register and is identified by reference to a registered plan. The folio records the dimensions of the land and its boundaries, the names of the registered proprietors, and any legal interests that affect title to the land. The State guarantees title and is usually supported by a compensation scheme for those who lose their title due to its operation."
Transferability
Title insurance policies can be transferred to the next title holder, for a fee, or to a bank or financial institution for mortgage purposes, once.
Differences in policies
Toronto real estate lawyer Bruce McKenna points out[4] that, in his opinion, there is a significant difference among title insurers. Conventional title insurance policies cover a lawyer's negligence only if the mistake relates to a loss that is listed in the policy as an insured risk.
In contrast, only TitlePLUS[5] routinely makes available comprehensive coverage for the legal services provided by a lawyer, in addition to the listed risks. In other words, any negligence by a lawyer in a real estate transaction is covered by a TitlePLUS policy, whether or not the mistake is an insured risk set out in the policy.
What this means is that in a real estate transaction, if a lawyer makes an error amounting to negligence, the legal services coverage in a TitlePLUS policy protects the homeowner, even if the lawyer's mistake is not related to one of the itemized title risks insured by the policy.
One example of legal services coverage occurred when the buyer of a condo unit told her lawyer she wanted to pay cash, but wound up getting stuck with paying interest on a vendor-take-back mortgage during the interim occupancy period. The legal services provision in the TitlePLUS policy compensated the buyer for her $9,000 loss – even though the policy did not specifically insure against this type of loss.
Without the coverage, the client would have had to sue the lawyer for the loss.
Potential pitfalls
On the surface, title insurance looks great.[6]
The bigger picture is not necessarily so bright, as ultimately the integrity of the Canadian title system is at risk. The concept of insuring title was developed in the U. S. in response to the need to offer clear titles in a myriad of systems of title registration choked by error, ambiguity and lack of cohesiveness.
The Canadian system does not have the same need, and long-term, its traditional efficiency will likely be affected. Properties insured without search or survey can become subject to running errors. Resolution of such errors can only be corrected by a full search and detailed survey which, in effect, is our current and traditional system. Simply put, title insurance at its best can be a cost-effective tool and at its worst a time consuming administrative nightmare.
Carriers are also, to date, vague on restrictions and eligibility with one of the larger carriers asserting that any home found eligible by a relocation company would qualify as insurable.
