What is Title Insurance?
Title insurance is a form of insurance that was first sold in the United States in 1867 to protect property owners and mortgagees against loss through adverse claims or hidden interests in their properties. This uniquely American product was developed as a result of inadequate deed registry systems; the reliance on privately held mortgages, which were not always registered; and the somewhat haphazard manner in which lands were opened for settlement.
Title Insurance is still used in much of the United States because of:
The continued poor condition of deed registry systems in many states.
The uneven manner in which American lawyers and surveyors are licensed and regulated from state to state.
The custom in some jurisdictions to complete real estate transactions through escrow companies without the benefit of legal advice.
Because of these problems, the U.S. Federal government has made the issuance of a title insurance policy a mandatory requirement of any lending institution selling mortgages through security pools.
As a result it is virtually impossible to obtain a mortgage in the U.S. without first buying a title insurance policy to protect the lender. It should be noted that, in most states, a Surveyor's Real Property Report must accompany a Title Insurance policy.
In Canada, the orderly opening of the land for development, and the subsequent evolution of our Land Registry systems, have provided security of tenure through reliable documentation of land ownership and of interests in land.
Many of the land registration systems in Canada do not recognize unregistered interests and give priority to the earliest of any conflicting documents. As a result, virtually all documents conveying an interest in land are registered in the Registry Office as a matter of course and are of public record. Further, the organization of the records, by property or by lot, ensures that all the records relating to a parcel of land are indexed together.
In Ontario, the government ensures the reliability of the land registry system by maintaining an Assurance Fund to compensate any persons who have been wrongfully deprived of an interest in land due to an error in the operation of the system.
This means that lawyers and surveyors who research the quality and extent of title for a purchaser, before a transaction is finalized, can rely on the public records in the course of their work.
Further, the combination of the government Assurance Fund and the professional liability insurance that lawyers and surveyors must carry ensures that the public is protected from loss through errors or omissions.
Canadians, unlike their neighbours to the south, have traditionally relied upon surveys of the properties they were about to purchase to reveal information about the property that was not available solely through the title records.
When a survey is made, the municipality can be contacted to confirm that the building(s) on the property conform to the zoning and building by-laws. A current survey will alert a purchaser or lender to any problems such as recently built additions, outbuildings or garages that extend beyond the property limits or contravene the municipal by-laws. The survey will reveal the existence of easements, rights-of-way or encroachments and any disparities between the legal description of the land and the extent of occupation.
Over the last ten or fifteen years a large majority of properties in Ontario have been sold or mortgaged, often several times, and have had title reviewed on each such occasion. If, during such review the lawyer found a minor flaw in a document, or questioned the manner in which an estate had been settled or a mortgage or lien discharged, or if the survey had revealed problems with respect to the extent or occupation of the lands, he or she would normally have worked with the vendor's lawyer to remove the cloud on title which such flaw or question may have created.
If it were impossible to remedy the problem with respect to quality or extent of title, the lawyer would have advised his or her client that the transaction should not be completed or, if appropriate, a reduction in the price of the property would be negotiated.
Where remedial action has been taken, in the course of investigating title, it has had the effect of cleansing or refreshing title. As a result, the vast majority of properties in Ontario have clear marketable title and property owners are well informed as to the quality and extent of their title.
Title Insurance in Canada
Until 1991, when three American title insurance companies decided to expand their operations to Canada, there had been no demand or demonstrated need for title insurance in this country.
Initially, marketing of the insurance was directed at lawyers and financial institutions. Policies were offered primarily as lenders' insurance to be paid for by the mortgagor, who could also purchase similar but less comprehensive, coverage under a second policy on their own behalf.
The approach to lawyers is that they can act as agents for the insurers while arranging mortgages for their clients. It is suggested that insuring over minor flaws in title could reduce the lawyers' workload, as some of the normal enquiries now made with respect to properties would no longer be required by the insurer.
The approach to lenders is that there would be lower administrative costs in the loan approval process, as the insurer would deal with the lawyers' reports.
Purchasers are being advised that the cost of a survey can be avoided by the purchase, at a lower cost, of title insurance. The inference is that the survey is of no value to the purchaser and can conveniently be replaced by title insurance to expedite loan approval. This is unfortunate, because title insurance does not provide any information about a property to an owner or lender. Any problems that may have been revealed by a survey are passed on to the uninformed purchaser or lender, to be resolved by them at some later date.
Title insurance is offered here at much lower rates that prevalent in the United States, namely $200 for lenders' insurance for a property valued to $500,000 and $50 for the additional owners' policy. This compares to US $1300 for lenders' and owners' policies for a $200,000 property in New York and US $887 for similar coverage in California.
Because of the short time that title insurance companies have operated here, it is not clear if the rates are actuarially sound. One must assume that they are and that the low rates reflect the limited risk inherent in our land registry systems.
Choices
Title insurance may well have a place in real estate transactions, especially those involving complicated land assemblies and financing. It should be viewed as complimentary to the traditional process of investigation of quality and extent of title rather than as an alternative.
It is common sense that significant financial commitments should not be made without full knowledge of all the relevant facts, potential liabilities and inherent risks in the venture.