Title Insurance 101 : What homeowners need to know

You finally found the perfect house!

Your biggest achievement, your biggest asset – how do you keep it safe?

Before you purchased your home, the property may have changed hands several times. Even with a new build, somewhere along the way there may have been an error made such as an incorrect survey, a non-existent permit or title-related issues that can affect your ability to sell, mortgage, or lease your property in the future. These are the types of things that a title insurance policy can protect you against.

What exactly is title insurance?

Title insurance is a unique form of insurance. Unlike home insurance where you are insuring the structure and contents, title insurance protects you, the homeowner, against actual loss as a result of challenges to the title (ownership) and other defects relating to your property. Plus, remedying the issues or legally defending your ownership can be very costly and stressful. There is a lender title insurance policy and a home owner title insurance policy. Both are very important. Some lenders require the lender title insurance policy. How much does a policy cost?

For a low one-time premium, you can ensure that you have the protection you need for as long as you own your home. The actual cost of a homeowner policy is based on your property value and varies by province. Your lawyer can provide you with a quote within minutes. This insurance is set up by your lawyer and the lawyer will explain the costs but generally the lender title insurance policy is less than $200 and the homeowner policy is an additional $75. A small cost to protect your title in the future.

What does title insurance cover?

A typical title insurance policy covers common issues (known and unknown) that may have happened both before and after you’ve purchased your home. This is sometimes referred to as pre- and post-policy because the day you take ownership of your home is generally also the effective date of the policy.

The main areas of coverage in the Homeowner Policy are:

• Fraud — a person fraudulently transfers your property without your knowledge or consent.
• Forgery — someone forges your signature on a registered document, which enables them to sell or mortgage your property.
• Encroachments — if a structure built by a previous owner sits outside the property’s boundaries or if a neighbour builds a structure that is partially on your property after you purchase your policy.
• Lack of building permits — if a previous owner completed work on your property without the required building permits, such as an addition or improvement, you could be forced by your municipality to remove or remedy the structure.
• Duty to defend — if you have to protect and restore your title as a result of a covered title risk, FCT will pay for the legal fees and costs associated with it.

When your clients are purchasing a new property, they may be looking to save money wherever they can. One of the topics that may come up is title insurance. For instance, clients may ask, “Do I really need to spend the extra money on title insurance?“

As a legal professional in the real estate industry, you know that title insurance from the right partner can mean the difference between closing smoothly and not closing at all. It offers coverage against survey and title issues/defects, as well as providing the best defense against title fraud.

For instance, Jason and June* finally found their dream home after years of saving and searching for the right property. Once financing was approved, they happily moved into their newly purchased home. Shortly after moving in, they received a notice from the city about outstanding tax and water utility charges amounting to over two thousand dollars. This was a very unwelcome surprise given their tight budget as first-time homebuyers. Luckily their lawyer had recommended they purchase a title insurance policy, which covered outstanding tax and utility bills. Because of their title insurance coverage, they were spared the extra expense when the claim was paid out by FCT.

Why do lenders require a title insurance policy?

Keep in mind that a lender provides a lot of money for someone wanting to finance a home and, in addition to earning interest, a lender needs to know that its money is secure and will be repaid.  A mortgage is that security – it gives a lender the right to sell or acquire the property should the borrowing owners default on the loan.  So, a mortgage lender can actually become the property owner and need to sell that property to someone else.  Viewed through this lens, the need for title insurance becomes clearer.  The lender needs the same protection from title errors, defects, claims, etc. as any homeowner and needs to know that the title is marketable to allow for the ultimate sale of the property to another buyer.  The lender policy gives this protection.  But, let’s back up a bit.

Mortgage Validity, Enforceability & Priority

The most fundamental element of the lender’s security is its ability to take over the property upon default.  The entire lending proposition relies on this premise.  What if it’s not so?  What if the mortgage is found to be invalid or unenforceable by the lender?  This can occur for a number of reasons, not the least of which is fraud.  A lender policy insures these critical elements of the mortgage and it also insures that the mortgage has its rightful priority against other claims.

Lack of Survey

This is a very interesting provision of the lender policy that benefits both the lender and the borrower.  From a protection viewpoint, the lender has coverage for any defects that would have been shown on an up to date survey.  Since the lender is covered, the survey is redundant and, unless the borrower has other reasons for requiring a survey, the often significant cost of a survey can be avoided.

Numerous other protections are offered in the lender policy for situations such as:

• Lack of pedestrian or vehicular access to and from the property
• Failure of the property to contain a single family residence
• Outstanding work orders against the property
• Unknown planning act violations

There is also protection built in for things that may occur after the policy is issued.  Certain construction lien situations and lack of appropriate municipal permits for renovations are two common examples in which coverage is provided.  And, there is important fraud and forgery coverage for post-policy events such as a fraudulent mortgage discharge.

The general policy provisions described above provide some insight into the breadth of protection contained in the Lender Policy.  For a full understanding of these and other provisions, you should refer to the actual policy for specific coverage and exclusions.

Clearly, many of these policy elements have been crafted to meet the unique needs of lenders.  Title insurance is not a ‘one size fits all’ concept.  The expertise in each of FCT’s product areas allows unique risks to be analyzed and understood.  The result is an evolving set of title insurance and business solutions for a wide variety of complex customer needs.

Content by: First Canadian Title