Title insurance is growing in popularity in Canada, but what is it exactly? Should you get it? Do you need it? Whether title insurance is right for you or not, is something you should discuss with your lawyer as it depends on the circumstances of your transaction.
Here is some background information about title insurance to help you make an informed decision.
Title to Property
Title is the legal term for ownership of property. Buyers want “good and marketable” title to a property-good title means appropriate for the buyer’s purposes; marketable title means title the buyer can convey to someone else. Prior to closing, public records are “searched” to determine the previous ownership of the property, as well as prior dealings related to it. The search might reveal, for example, existing mortgages, liens for outstanding taxes, utility charges, etc. registered against the property. At closing the buyer expects property that is free of such claims. Normally they must be cleared up before closing. For example, the seller’s mortgage will be discharged and monetary expenses such as taxes and utility charges will be paid or adjusted at closing.
Sometimes problems (or defects) regarding title are not discovered before closing or are not remedied before closing. Such defects can make the property less marketable when the buyer subsequently sells and depending on the nature of the problem, can also cost money to remedy. For example, the survey might have failed to show that a dock and boathouse built on a river adjoining a vacation property was built without permission. The buyer of the property might have been conveyed to a previous owner fraudulently, in which case there is the risk that the real owner may come forward at some point and demand their rights with respect to the property.
Who is Protected With Title Insurance?
Title insurance policies can be issued in favour of a purchaser (on new/resale homes, condos, and vacation properties), a lender, or both the purchaser and lender. Lenders will sometimes require title insurance as a condition of making the loan. Title insurance protects purchasers and/or lenders against loss or damage sustained if a claim that is covered under the terms the policy is made.
Types of risks that are usually covered under a title insurance policy include: survey irregularities, forced removal of existing structures, claims due to fraud, forger or duress, unregistered easements and rights of way, lack of pedestrian or vehicular access to the property, work orders, zoning and set back not-compliance or deficiencies, etc. For a risk to be covered, it generally has to have existed as of the date of the policy. Certain types of risks might not be covered. For example, native land claims and environmental hazards are normally excluded. Be sure to discuss with your lawyer which risks are covered and which are excluded.
The insured purchaser is indemnified for actual loss or damage sustained up to the amount of the policy, which is based on the purchase price. Some policies have inflation coverage, which means
that if the fair market value of the property increases, the policy amount will also increase (up to a set maximum).
How Long is the Insurance Coverage?
In the case of title insurance covering the purchaser, title insurance remains in effect as long as the insured purchaser has title to the land. Some policies also protect those who received title as a result of the purchaser’s death or certain family members ( spouse, or children) to whom the property may have been transferred for a nominal consideration.
In the case of title insurance covering a lender, the policy remains in effect as long as the mortgage remains on title. A lender, the policy remains in effect as long as the mortgage remains on title. A lender covered under a title insurance policy is insured in the event the lender realized on its security and suffers actual loss or damage with respect to a risk covered under the policy. Lenders are usually covered up to the principal amount of the mortgage.
The premium for title insurance is paid once (at the time of purchase). Generally speaking, in Canada the purchaser of the property pays for the title insurance, though there can be situations where the seller pays for it. Some policies automatically cover both the purchaser and lender; others will cover both for a small additional fee.
Protection and Peace of Mind
Title insurance can help ensure that a closing is not delayed due to defects in title. If an issue relating to title arises with respect to a risk covered under the policy, the title insurance covers the legal fees and expenses associated with defending the insured’s title and pays int the event of loss.