What's in a title?

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Title insurance protects against much more than fraud and knowing what it covers can also help brokers and their clients before a sale closes

A back deck or a shed usually aren’t deal breakers when it comes to buying a house, but if the purchaser doesn’t have title insurance, that beautiful backyard oasis could turn into a money pit. If it’s discovered that the deck was built without a required permit or the land survey shows the shed is actually on the neighbour’s property, the homeowner may have to pay to have the deck rebuilt or have the shed removed – not something the homeowner probably budgeted for when they purchased the property.

"Those are the kinds of things that can cost a significant amount of money,” says Karen Decker, vice-president, underwriting and legal at Stewart Title Guaranty Company. “It’s unexpected to a homeowner and without title insurance to provide coverage for their losses, it can really be a burden for a homeowner.”

It’s something the insurance providers are seeing more of says Ray Leclair, vice-president, public affairs with TitlePlus. “What we’re seeing more of now is building compliance issues.

“Sometimes it can be remedied if a building permit is obtained and the work passes, but we are seeing situations where the work is not in compliance with building codes and fixing it can be costly.

 We’ve had to rebuild whole additions.”

Leclair calls it the “lottery effect.” There may be little risk that it will happen, but if it does, title insurance can provide protection.

Having title insurance also gives buyers choices during the purchase, says Leclair.

“Don’t rely solely on the title insurance and forgo doing title searches. The information may be important, more important than having a right to claim, because no one wants to file an insurance claim. The buyer should discuss it with the lawyer and decide if they want to rely on title insurance or another remedy.”

In the case of a non-compliant deck, for example, it can simply be removed as one solution, but if that deck is really important to them, the buyer maybe wants the vendor to fix it before closing or adjust the price.

“You can also leave the deck as is, knowing the likelihood of it being found to be not compliant is very small,” says Leclair. “Perhaps you’re willing to take that risk, but the lender isn’t. So title insurance can again provide a solution, because it will insure over the problem for the lender and then both the buyer and the lender are happy to proceed.”

While title fraud gets the most media coverage when it comes to title insurance, Decker say it’s important to keep in mind the coverage the product offers is very broad. “Many items are not readily discoverable at the time of purchase, but exist and surface at some date in the future.” In addition to certain building department compliance issues, this can include liens and tax arrears.

“It’s important to consider that a purchase of a home by an individual is probably the biggest investment in their life, so to have the peace of mind that title insurance policy provides, at a low one-time premium, makes sense for the homeowner and also from the lender’s perspective, as they want additional protection for their security that they’re getting for their loan,” says Decker.

Before title insurance was introduced in the 90s, traditionally what was done, was the buyer obtained a professional opinion from a lawyer that they had a good marketable title or a good charge as the lender. “The title insurance policy doesn’t replace the role of the lawyer,” says Leclair. “What it does is replace that opinion. The insurance policy stands instead of the opinion. The advantage of that is that it creates a direct link between the client and the insurer.

Previously, if there were a problem, you would need to prove the negligence of the lawyer to be able to claim any relief. With a title insurance policy, it’s basically like any other insurance claim: You call the insurer, they send an adjustor and there is a direct negotiation between the insurer and the client. You’re not restricted to matters of negligence as under the opinion, but anything that’s under the policy.

“The policy is a very specific contract; it’s not all risk. It’s an enumerated risk situation. Most policies have the same coverage. They cover title matters, but that’s actually a misnomer; title insurance covers a lot more than title matters and much more than the opinion used to cover.”

According to Leclair, a TitlePlus policy offers coverage for legal services. “Anything the lawyer did or should have done, but didn’t do properly even if not related to title, such as advising on taxes, or the agreement of purchase of sale. No need to sue your lawyer separately outside of the title insurance policy.”

Stewart also offers an enhancement to its policies covering lawyer negligence, which is obtained through an endorsement called a “closing protection letter.”

With virtually every residential transaction in Ontario title insured and the across the country the acceptance level is growing, particularly in B.C. and Atlantic Canada, according to Decker.

“If you’re not aware of title insurance you’re really behind in the knowledge level of how real estate is practiced.” She says the interest in title insurance has grown, both within the broker community and consumers in general, which helps both parties.

“Knowledge of title insurance helps guide the client,” says Decker. “If they discover a problem and they come back to the mortgage broker and it looks like the deal might not go through, it’s always wise to at least investigate with your title insurer whether or not it’s something we can provide coverage over to allow the deal to close.”

Decker says her company frequently gets calls from buyers who have a pending transaction and have discovered a title defect and we will look at the issue and if we can determine that it’s within our comfort level in terms of risk, we can add specific coverage into the policy to provide a level of protection for that particular known item, which gives the purchaser or lender the comfort to allow the transaction to proceed.

“The fact that we’re able to facilitate deals closing, benefits everyone involved in the transaction, including brokers.”

Title insurance gives the client protection after closing as well, says Leclair.

“The lawyer can tell you on the day of closing, at the time of registering your mortgage that you are the owner. But tomorrow, he can’t tell you what will happen, because a fraudster may come in and discharge your mortgage or transfer your property illegally. The lawyer is not negligent in that case, but title insurance has an obligation to defend the title and the insurer will step in at that point and attempt to reverse the damage done by the fraudster and paying for any legal costs to get that done.”

Title insurance can also save time and money at closing. “If you have a short closing and you need to do an off title search, but the municipality will take six to eight weeks to get back to you, you either have to take the risk that there won’t be anything wrong or they can get title insurance, which could cover the risk,” says Leclair.

Title insurance is a type of protection that is affordable, being a one-time cost, which is different than other kinds of insurance. Homeowners pay for it when they acquire it and it remains in place as long as they have an interest in that property.

Both Decker and Leclair agree that growth in the title insurance market is coming from the commercial sector, in addition to markets outside of Ontario and that growing the use of the product is really an educational process.

“The value of the policy is starting to show,” says Decker. “Certainly people have had experience with it, they’ve seen how claims are handled and have a comfort level with the industry. Growth is also occurring in Western Canada where not long ago there were some cases of mortgage fraud that showed lenders that if they really want to protect their interests they need a title insurance policy underlying their security.”

While premiums have risen in accordance with growing home values, Leclair says a corresponding increase in claims isn’t something the industry is concerned about.

“There have been some spikes in claims on different issues from time to time, but I think that’s just like any insurance you have,” he says. “Increasing claims are due to the maturity of the product. Title insurance has only really been around since the 90s and problems don’t necessarily show up unless you transfer the property, so there’s a good reason why those claims haven’t been brought forward until now.

“More people are turning to title insurance, where in the past they may not have been aware that it covered certain types of issues.”

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