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23 May

Demystifying title insurance


Posted by: Aneta Zimnicki

I thought it is worthwhile to inject clarity into this topic because now, the overwhelming amount of lenders require ‘title insurance’ (usually it is stated on the mortgage commitment ‘up to date survey, good marketable title or, in lieu, lender title insurance is acceptable ‘). If you need to take away one piece of vital information from this blog post, it is this:

there is a difference between lender title insurance and homeowner title insurance.

What you see in the mortgage commitment typically is the requirement for you to acquire lender title insurance only. However, this protects only the lender and not you. Typically, a title insurance claim ends up affecting the homeowner more than the lender, so even though lender title insurance essentially covers the same items as a homeowner title insurance, you would be out of luck! To rectify that, you would acquire the complementary homeowner title insurance. Depending on the vendor, sometimes the insurance is sold as two separate entities, other times it is bundled. Title insurance is very common in most parts of Canada, for example in Ontario 95% of purchase transactions close with title insurance. Most Ontario lawyers, for example, have it as a policy to offer title insurance, and they usually work with one or two title insurance vendors. During the purchase transaction, the lawyer acquires title insurance for you and invoices you the cost, each title insurance policy is a couple of hundred dollars. Remember to add this cost to your closing budget to avoid surprises.

Title insurance has many benefits. In my opinion, especially if you are running a real estate investing business, you want to mitigate as many risks as possible, this insurance is worthwhile. Title insurance is an insured statement of the condition of title of real property at the time the policy is issued. What that means is, in general, title insurance covers any issues that are in existence (could be unknown) up to date of purchase, with the exception of fraud and forgery, which is covered even if it occurs after your purchase. What happens is, in lieu of the plethora of searches the lawyer would normally do, the title insurers takes on the risks and requires only limited amount of searches (one of the mandatory searches being a title search) . This drastically reduces the turnaround time and legal costs, as lawyer does not have to do these ‘off-title’ searches which are found in various places and databases, and ensures for a smooth closing. For a residential transaction, title insurance covers 33 risks for a home owner, and 27 risks for a lender including: unmarketability of title, property taxes left unpaid by previous homeowner, defects in title, invalidity of unenforceability of the insured mortgage, priority of certain construction liens, defects that would have been revealed by an up-to-date survey, absence of certain off title searches and lack of access. Depending on your purchasing strategy, you still may choose to direct lawyer to do some of these covered searches (however, this will incur additional expense) or you can do some yourself, as it could bring to light information about the property you may want to know and negotiate on. For example, a highly problematic rental property with a history of work orders, might not be worth your time and you may choose to pass on the purchase.

An up to date survey is not required when ordering title insurance however when there is an existing survey available, the lawyer must disclose tot the title insurer if it discloses a defect. In this case, the insurer can still insure, perhaps with exceptions or modifications to the policy. Surveys cost about $1000, and take time to complete, purchasing title insurance instead for a couple hundred dollars will save you money. However, you still might want to do a survey as part of your purchase negotiations, if you are planning to do renovations, building additions, or want to iron out any issues that can potentially affect your purchase and planned use of property.

Title insurance claims are only acceptable when an issue occurs. So if is a condition that is defective, but it doesn’t bother anyone, it is a not issue, only when it becomes an issue will the insurer consider it. For example, encroachment of pool into neighbouring yard, no problem, but now neighbour wants to build their own pool, need the space, does their up to date survey, discovers discrepancy, problem. Another example, new homeowner receives notice from municipality regarding an outstanding work order (previous owner’s doing), title insurer would cover the rectification of the situation.

Title insurance has been around only for about 20 years, so there would be many existing home owners that do not have this insurance. It is prudent to protect oneself these days, especially with the increase of fraud activity. There are many flavours of title fraud, one being when someone impersonates you, the homeowner, gets a mortgage and takes off with the money, sticking you with the debt. For this fraud, many predators prey on ‘free and clear’ homes, unfortunately seniors are taken advantage often. Another fraud is when the homeowner imposter sells your property, unbeknownst to you, takes the buyer’s money and runs, leaving you with no ownership of the property. There have been cases where tenants (usually the quiet, ‘perfect’ ones that don’t complain) take advantage of the absentee landlord and pretend to be the homeowners! Ouch!

No need to worry, an existing homeowner can easily get an existing homeowner title insurance policy by contacting a title insurance company or a lawyer (more expensive route). Title insurance licensed in Ontario include: Chicago Title, FCT Insurance Company Ltd, Fidelity National Financial (FNF), Stewart Title, St. Paul’s Guarantee Company, Title Plus, Travelers Group.

As long as homeowner owns the property, homeowner title insurance stays with homeowner and lender title insurance is transferrable from lender to lender, provided it is a simple loan switch and not a refinance.

In summary, the way I see it, insurance is a necessary business tool. You pay for it, but hope that nothing happens where you need to make a claim and get your money back. The couple hundred dollars invested in title insurance for each of your properties in your real estate portfolio buys you a lot of peace of mind and peaceful sleep :o)