Land title insurance was mentioned a number of times in class and I had not heard of it, even though I have been the owner of 6 properties, and I wanted to understand it better.
Title insurance indemnifies the holder of the policy against financial loss from defects in land titles and invalidity or unenforceability of mortgage loans. There are 2 basic types of policies – owner and lender. Premiums are paid only once and the coverage usually lasts while the owner/lender has an interest in the property. The maximum coverage is usually the purchase price of the property in the case of an owner’s policy and the value of the mortgage in the case of a lender’s policy. The one-time premiums for both are usually paid by the owner.[1]
The biggest market for title insurance is the US where, in 2019, the industry took in almost 12 billion USD in premiums.[2] Although the land title system is used in parts of the US, it relies heavily on the land recording system, which requires a title search each time a property changes hands. Title insurers in the US conduct title searches of properties before agreeing to insure the properties. If they find defects, such as tax or mechanics’ liens, they can be resolved before the transfer.
Regular insurance, such as home or auto insurance, is meant to handle unforeseen events that may happen in the future. Title insurance, on the other hand, is meant to handle problems that have already occurred in the past. So, if these events have already happened, why don’t we know about them and make them go away? The reasons are that not all title defects are known, there may be unknown encroachment issues, title fraud, and errors or omissions of the land registration system. All of these eventualities are usually covered by basic title insurance.
Features beyond basic coverage includes building compliance (indemnifies the policy holder for the cost of correcting renovations by previous owners that were not in compliance with building codes at the time), legal services (if your lawyer made a mistake, you should be able to sue him because he has to carry liability insurance, but this feature eliminates the need to sue), and identity theft (covers the cost of restoring your good name and credit).[3]
It is important to note that title insurance does not guarantee the boundaries of a property and, therefore, is not a substitute for a survey. In addition, title insurance does not cover defects you already know about, environmental hazards such as soil contamination, indigenous land claims, matters that are not recorded in public records and zoning bylaw violations created by the owner.
Do we really need title insurance? It is not mandatory in Canada but many lenders may require it for their own protection. In most of Canada, government guarantees the title and a land titles assurance fund is maintained to compensate owners for title fraud and errors or omissions of the land registration system.[4] Title fraud appears to be covered by both the land titles assurance fund and title insurance.
Title insurance is becoming more popular in Canada for a number of reasons:
- property buyers are comparing the cost of title insurance with the cost of a survey and choosing title insurance
- property buyers are pressed for time and cannot arrange a survey on a timely basis
- the availability of title insurance is more widely known[5]
I do not like insurance in general and the cynic in me warns the policy holder to consider well if title insurance is needed or appropriate, or if a survey is better, or to obtain both. Insurance policies can be complicated and difficult to understand. All insurance policies have limitations and it is important that the owner is aware of the provisions of the policy. Caveat emptor!
[1] Wikipedia, Title Insurance (2020). https://en.wikipedia.org/wiki/Title_insurance accessed March 31, 2020.
[2]North American Title Company (2019) ALTA Reports Title Premium Volume Up 2.5 Percent Through Three Quarters. http://nat.com/NATNews-Blog/December-2019/ALTA-Reports-Title-Premium-Volume-Up-2-5-Percent-T.aspx accessed April 2, 2020.
[3] Larock, David (2018). Title Insurance: How It Works and Why You Should Buy It. https://www.integratedmortgageplanners.com/blog/mortgage-product-commentary/title-insurance-how-it-works-and-why-you-should-buy-it/ accessed March 31, 2020
[4]Understanding Title Insurance, Financial Services Commission of Ontario (2008) https://www.fsco.gov.on.ca/en/insurance/brochures/documents/undstitins.pdf accessed April 2, 2020.
[5] Colbert, Yvonne (2017). CBC. What you need to know before buying title insurance. https://www.cbc.ca/news/canada/nova-scotia/home-buying-title-insurance-real-estate-land-surveys-1.4162925 accessed March 31, 2020.
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