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Title Insurance and it’s use in Real Estate

So you are finally set to close on a real estate property and move in to your new home. You have hired a real estate agent to help you find the property within your price range, in the neighbourhood of your choice and the offer has been accepted. You have decided on the lawyer you wish to work with and are eager to know how much all of this is going to cost. You find out from your real estate lawyer that title insurance will attract a fee of a couple hundred dollars. Given that this bumps up your costs during closing, you want to know what a title insurance policy is all about and how it works. Let’s find out…

What title insurance is NOT:

Let’s dis-spell some misconceptions about title insurance from the start. Title insurers stress the fact that their policies are certainly not intended to be any form of a home warranty and should not be misunderstood as such. For example, it does not speak to whether the property is well built or that the roof or foundation is intact and certainly does not provide coverage for the appliances purchased as part of the transaction. Neither does it provide a guarantee that you will be able to change the current use of the property.

Title Insurance – what is it?

When you purchase a real estate property, you obtain “title” to the property through a process under which the previous owner transfers their ownership to you. This is done by way of registration of a document called the Transfer/Deed under the Land Titles system. According to some accounts, title insurance has been around in the US since 1868 and was used to provide protection to purchasers for unanticipated title problems. However, it has picked up popularity in Canada in recent years where it is obtained virtually in all residential and a large majority of commercial real estate transactions. The focus under a title insurance policy is not to guarantee title, but instead is on providing compensation or damages depending on the loss or claim.

When completing a real estate purchase transaction, lawyers will routinely order a title insurance policy that provides protection for both the buyer as well as the mortgage lender if the property is mortgaged. The main reason is so that the policy holders have protection from certain risks that are present whenever real estate transactions are involved.

When title insurance is ordered by the law firm, the company charges a premium for the policy. The premium amount is lower if the transaction is a ‘cash’ transaction in that it does not involve a mortgage. This premium will be higher for properties that are of higher value and the amount of insurance is the actual purchase price of the property. The amount of the premium may vary depending on a number of factors some of which may include the type of property, the purchase price, the registered amount of the mortgage etc.

An important point about title insurance is that once it is ordered, the protection remains for as long as the insured party is on title without the need for renewals or monthly premiums. Once the deal has closed and your lawyer has ordered the title insurance, coverage will continue under the owner policy for as long as the same buyer owns the property.

Risks covered by Title Insurance:

In brief, according to the Financial Services Commission of Ontario, some of the most important coverages which may be available under a title insurance policy are as follows:

• Protection from defects in title – such issues may hinder ability to have clear rights to the property
• Conflicting ownership interests
• Liens that exist on title – for example, a previous owner has outstanding mortgages that remain on title or other liens such as condominium liens.
• Encroachment issues – where an existing structure on land needs to be removed because it sits partly on a neighbour’s property.
• Errors in surveys and public records
• Title Fraud

Essentially, title insurance ordered by your real estate lawyer will provide owners (and banks, if the property is subject to a mortgage and a lender policy is ordered) with a comprehensive and no-fault protection against title risks involved in a transaction.

Perhaps the most popular reason to have title insurance is to cover title fraud. As a general example, this may involve a situation where a fraudster deals with or transfers the title to your home without your knowledge. This may be by way of transferring title to him or herself by stealing your personal information and forging documents. The second step may involve the fraudster registering a mortgage on the title to your home and absconding with the funds. Of course, as the years go by, the fraudsters seem to get more and more advanced in their approach. Hence the need for the protection that title insurance provides. Here, the innocent party (insured) may later discover that the title to his or her property is defective when an unknown mortgage lender contacts them about the default in payment. Luckily, the protection offered continues after closing in that the individual may seek compensation from the title insurer due to the fraud.

In the real estate world, policies obtained for title insurance may cover different type of risks depending on the type of property one is purchasing. For example, there may be certain items covered on a residential policy jacket that would be excluded in a commercial policy. Typically, commercial policies require even more due diligence due to higher cost of properties and the increased cost of coverage.

Other risks that may be covered:

• Title defects such as liens, executions against title, encroachment issues
• Arrears in taxes
• Arrears in hydro and gas
• Executions against prior owners
• Fire department work orders against the property
• Hydro work orders against the property
• Compliance with conservation authorities
• Access limitations
• Planning Act contraventions
• Fraud, forgery, or false impersonation where they effect the insured’s interest on title

Exclusions from coverage:

When there are risks that are difficult to quantify, title insurers will typically exclude such from coverage. That being said, here is a small list of some of the standard exclusions that may be listed under your insurance policy:

• Environmental matters (termites, infestations, UFFI, underground storage tanks, soil contamination, leakage of water etc.)
• Land claims – Native or aboriginal
• Post-closing expropriations
• Future use in the event the owner changes the use of property
• Default on the owner’s existing mortgage
• Legality of rents under the rent legislation
• Risks known to or agreed by the insured but not shared with the title insurer
• Septic system functionality

Also, a title insurer will require a multi-unit endorsement for a property containing 2-6 units (including basement apartments) in order to provide additional coverage.

Conclusion:

Title Insurance serves as a lower cost alternative of closing a real estate law transaction and all parties, including the buyer and lender may be put to ease if a certain item is covered under the policy. It is often more cost effective to order a policy than to conduct off-title searches and / or obtain a new survey which can add up quickly. It is also known to be a time saver in the sense that it reduces the type and number of searches a law office has to conduct. As a no-fault compensation provider, it is no wonder title insurance has, in a sense, taken over real estate conveyancing and is a go-to choice for both law firms and home owners and lenders.

For further questions or information about your real estate transaction in Kitchener-Waterloo or surrounding regions, please contact our office.