What is title insurance?
Title insurance is a no fault insurance contract that will protect purchasers and their lenders if a loss arises because of defective title; that is, losses related to the property’s title or “legal ownership”. Said another way, a title insurance policy will insure an owner or lender against certain risks of loss or damages from claims made by third parties who may have competing interests in the property.
For a one time premium, the title insurance policy can provide protection from losses related to the following:
- Unknown title defects which prevent you from having clear ownership of the property;
- Existing liens against title (for example, the previous owner had unpaid debts from certain utilities that run with the land, property taxes, mortgages, or condominium charges secured against the property);
- Encroachment issues (for example, your shed needs to be removed because a part of it is actually on your neighbour’s lot);
- Title fraud (for example, someone fraudulently registers a mortgage on your property, or even sells it without you having any idea);
- Errors in surveys and public records; and,
- Various other title-related issues that may impact your ability to sell, mortgage, or lease the property in the future; and,
- Certain policies will provide “gap coverage” if there is a gap between closing and registration of the deed and mortgage, and also protect the purchaser against solicitor error.
Purchasers are protected for as long as they, their spouse or their children own the property. The lender is protected for the term of their loan. The policy may also cover most legal expenses related to restoring title. There are certain defects that are not covered by most title insurance policies. These include:
- Known title defects that were revealed to the purchaser before closing;
- Environmental hazards;
- Native land claims;
- Problems that would only be revealed by a new survey or inspection of the property (for example, the property is smaller than originally thought);
- Matters not listed in the public records, such as unrecorded liens or encroachments; and,
- Zoning bylaw violations from changes, renovations and additions to the purchaser’s property that the purchaser was responsible for creating.
Title insurance is not a home warranty or home insurance policy. It will not provide coverage for damage due to flooding, fire or sewage backup, wear and tear of the home, theft, or other non-title related losses.
The Financial Services Commission of Ontario has published a pamphlet which you are encouraged to read titled Understanding Title Insurance.
The Ontario Bar Association has also published a useful guide titled Working with a lawyer when you buy a home.
Do I need Title Insurance?
The answer to the second question is, in most residential transactions you do absolutely need to obtain a title insurance policy.
Although title insurance is not a substitute for obtaining an up to date survey, it will insure purchasers against failing to have an up to date survey. In most resale transactions the survey is either too old or it cannot be located. Lenders generally require that purchasers either produce an up to date survey or bind a lender’s title insurance policy as a condition to financing.
The coverage provided by title insurance also limits the scope of the lawyer’s work and reduces the number of off-title searches he or she needs to perform. The costs of obtaining these additional search results and/or obtaining an up to date survey will be much greater than the title insurance policy premium in most instances. This, combined with the fact that proceeding without title insurance means foregoing additional protections that only a title insurance policy would provide, makes title insurance a necessary requirement for most real estate transactions. These additional protections mainly relate to coverage for fraud related loss and gap coverage.
The only other option available involves obtaining a lawyer’s opinion on title, which would increase the purchaser’s legal fees and the disbursements payable to third parties because of the additional time and work involved, and additional funds required to obtain reports and certificates from different public or quasi-public entities. The main benefit of having a lawyer prepare a lawyer’s opinion on title is that any issues discovered can often be rectified prior to closing. Whereas with title insurance the purchaser’s main recourse if defects are discovered after closing is to submit a claim to the title insurer.
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