GUIDE TO INSURANCE: Title insurance - more than just fraud
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08/04/2010 10:00:00 AM
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After going through the sometimes migraine-inducing process of purchasing a new condo, the Smiths (not their real name) were elated that it was finally time to move in. That elation soon turned to shock when they were told that not only had a special assessment on the condo unit been performed, but they were responsible for the cost of it. It was the first they had ever heard of any special assessment, and there was no mention of it on their status certificate when they purchased the property. In fact, it was levied by the condominium board after the agreement was signing, but before their actual closing date.
Fortunately for the Smiths, when they were signing the agreement one thing they were sure to include was title insurance, and as such all of the expenses associated with the unexpected levy were covered.
Ask any title insurer and they should be able to tell you similar stories about how their products made the best of a potentially disastrous home-buying experience. As a mortgage broker, if you were the one to inform that homebuyer about the possibility of title insurance and what it can cover, then that obviously increases your chances that your client will be singing your praises and sending you those coveted referrals.
In fact, most only associate title insurance with mortgage fraud, which is really no surprise given the media attention that was given to several high-profile cases. These usually involved innocent homeowners who had the title to their properties sold unbeknownst to them or refinanced, only to find out about it when they received the bank letter congratulating them on their mortgage (for more on title fraud, see page 16 of this guide). But title insurance covers a lot more than just that.
"It's called title insurance because we insure title - fraud is only one component of it," says Pat
Squire, vice-president at the Chicago Title Insurance company, which is distributed through Fidelity National Financial (FNF) in Canada. "Fraud is just the most newsworthy, but if you're looking at it from a mortgage broker's perspective, you're looking at a loan policy and there are three heads of coverage there - fraud is just one of them."
Lorne Shuman, the legal services director at First Canadian Title, agrees, saying that "People gravitate towards the fraud because it's more juicy and sexy, but there is much more to title
insurance than just fraud."
He goes as far saying that calling it title insurance is a misnomer. "It's much more than title. It's almost title, plus survey, plus everything. It's more than just 'we protect your title.' We do a lot more than that."
What is title?
Title refers to the legal ownership of a property, which is registered in the government's land registration system when home ownership is obtained. Title insurance was first introduced in Canada as a replacement for an up-to-date land survey and has gained popularity, particularly in the past few years, because it protects both homeowners and lenders from any loss or damage related to fraud and other title-related issues.
According to the Financial Services Commission of Ontario (FSCO), for a one-time fee, also known as a premium, a title insurance policy can provide coverage from losses related to several things: unknown title defects that prevent the homeowner from having 100 per cent
ownership; any errors that may appear in surveys or public records; encroachment issues (this
pertains to things like if a structure has been built that encroaches onto a neighbour's property and needs to be removed); any existing liens against the property that are leftover from the previous owner, including things like utilities, mortgage arrears and taxes; any "other title-related
issues that can affect your ability to sell, mortgage or lease your property in the future."
"We call that marketability, which means the homeowner can sell it to a third party, and it's one
of the things that title insurance covers," says Shuman, explaining what happens in the event that a property is not marketable.
"The policy responds in a number of different ways," he says. "It can fix the problem via a cash settlement, it can remove or rebuild any encroachment, and in the event that a title is being attacked because a neighbour is making claims based on an old fence line or something, the policy will retain a lawyer and fight on the homeowner's behalf. In the event that the property is lost, then we have an obligation to compensate that loss because we insured that the title was good."
There are three types of residential policies available through title insurance companies: policies for new homeowners, existing homeowners and lenders. The homeowner policy and the lender policy (which can also be called a loan policy) are packaged together because the owner's policy - which lasts as long as someone owns a property - protects the actual title and any liens against it while the loan policy safeguards the mortgage.
Residential title insurance can provide several different types of coverage, such as: comprehensive, which covers losses related to title, including a negligent lawyer and errors made; gap, which insures homeowners for the time it takes them between the home closing date and the time the title is registered; survey, which takes the place of requiring an up-to-date survey. Many lenders will also accept this as an alternative to a survey or Real Property Report
(RPR); legal, which covers legal expenses accrued when homeowners are forced to defend their title.
The three largest title insurance companies in Canada - First Canadian Title, Stewart Title and Title Plus - all provide these bundled policies at one-time premiums ranging from approximately $150 to $350 (for properties up to $500,000). Premiums depend on the location (province), price and type of property and if it is a new home or resale.
For new homebuyers, however, title insurance has become a standard - in fact, many lawyers add an owner's policy directly into a legal fee for home-related transactions. Title insurers also offer existing homeowners' coverage for those who didn't buy title insurance when they purchased their property.
"There are very few lawyers who would close a deal without title insurance these days," Michael Maguire, a broker with Mortgage Intelligence in London, Ont. told CMP. "The lawyers like it because it limits their liability and because it simplifies the legal process."
As a standard, lenders are also purchasing title insurance policies as fraud protection, especially because these companies are no longer protected by the legal system (it has placed the onus to pay fraudulent mortgage on lenders as opposed to victimized homeowners).
Evolution
Title has actually come a long way from its first intentions, and more and more homeowners, once educated about the benefits, are opting to buy in.
"The original purpose of title insurance was covering title and fixing title-related issues," says Squire. "We would see things where you have a fence this way or that way, or there are historic registrations on title that could prevent a deal from closing or slowing it down enough that the buyer would walk. But it's evolved from there, and actually become a prerequisite for some lawyers before even considering signing the final papers."
A lot of this has to do with the amount of time it can save at the point of closing.
"It's actually gotten to the point where we provide efficiencies at closing," he says, adding that "about 90 per cent of transactions in Ontario are using title insurance now."
Beyond the time of purchase, it also speeds up any legal processes that would regularly tie up the homeowner.
"Once someone has the policy, there is no need to prove anyone was at fault, no need to go after somebody and start a lawsuit," says Shuman. "It's a no-fault mechanism to resolving disputes and it's more direct than going to the courts, getting lawyers involved and accruing all those costs. So it's quicker, less expensive, more efficient and a better process for the buyer in the event that there is a problem."