Title Insurance – Essential or Unnecessary?

Recently, I acted for a client who wanted to forgo title insurance on his house purchase. While it is true that title insurance is not mandatory in Ontario, I did my best to dissuade him, because I firmly believe that title insurance is a relatively inexpensive way to achieve peace of mind for years to come. And what’s more valuable than that?

What is title insurance and why do you need it?

Title insurance is a form of insurance that protects the owner of a property against financial losses from defects in title to real property. The coverage begins when you buy the policy and extends indefinitely into the past, covering any inconsistencies in the documented history of ownership.

The protection of title insurance is also important for lenders, who need to know that the mortgage they hold will not be unenforceable due to a title defect. For this reason, most mortgage lenders require title insurance, even though it is not mandatory from a legal standpoint.

What types of title issues are covered?

There are many risks involved in the acquisition of title to a property. These risks range from something as innocent as a mistake – documents previously filed could inadvertently have been wrong – or something as shameful as a forged transfer of ownership rights.

Here are some examples of situations where title insurance will protect you:

  • another party claims an interest in your property;
  • a fraud (such as forged documents or false impersonations) is/was committed;
  • zoning bylaws have been breached;
  • there are outstanding work orders or liens against the property;
  • the property encroaches on an adjoining property, or vice versa; and
  • surveys or public documents are found to contain an error.

Whom does title insurance protect? Owner’s vs. lender’s title insurance

Owner’s insurance, like the name suggests, protects the property owner from losses that are listed in the insurance policy. That coverage continues as long as the property is owned by the title holder and the policy has a set amount of coverage. Lender’s insurance, on the other hand, protects the mortgagee who helped fund the purchase. Keep in mind that the lender’s policy will only cover the amount of the mortgage, and not the full value of the property.

Do you have a choice?

Technically, a property owner can choose whether to obtain title insurance or not, since title insurance is not mandatory in Ontario. However, to the extent that the buyer requires mortgage financing for the purchase, most mortgage companies demand lender’s title insurance.

How much does title insurance cost and who pays for it?

Premiums for residential properties only cost a very small fraction of the purchase price. Unlike other forms of insurance, the buyer only pays for title insurance once, and there are no ongoing costs associated with it. With respect to lender’s title insurance – this is generally also paid for by the buyer as part of their mortgage closing costs.

Are there other benefits of title insurance?

The availability of title insurance plays a useful role in speeding up the process of closing.  When title insurance is purchased, many municipal searches – such as zoning and building compliance – are no longer required, thereby reducing the time period that clients have to wait before being in a position to close their transaction. At the same time, legal fees are kept to a minimum, since these time-consuming inquiries do not need to be made. As well, buyers are protected from the risk of errors by the municipality. (Typically, responses from municipalities were qualified to exclude errors and omissions and therefore may not have been very reliable in any event).

The benefits of title insurance – in a nutshell:

  1. Speeds up closing process
  2. Keeps legal fees down
  3. Protects buyers from the mistakes of others
  4. Offers peace of mind.

It is important to note that title insurance is not a substitute for a lawyer’s services, and we still conduct a full title search for our clients. Any encumbrances (for example, a right of way or a utility easement) that are discovered during the course of a title search are brought to the attention of our clients.

What is not covered?

Like all insurance policies, there are some exclusions to coverage that a buyer should be aware of. For a risk to be covered, it usually must have existed prior to the policy date and not be something that you created after you became an owner. Exclusions can include defects in title that you knew about before closing, aboriginal claims, environmental contamination, problems that would be discovered only by a new survey or inspection (such as a smaller lot size than originally anticipated), matters not listed in public records, zoning bylaw violations caused by renovations or additions performed by the policy owner, tenancy issues (such as the legality of rents or basement apartments), matters disclosed in a home inspection report, and the buyer’s ability to change the use of the land or undertake renovations or expansion. In other words, title insurance isn’t blanket coverage for your property, and will not protect you from every possible scenario. As well, remember that title insurance is also not a replacement for home insurance. Home insurance protects your home and its items from damage from the weather, fire and theft.

To sum up

Title insurance is an important component of a real estate transaction. Overall, if you value peace of mind over a relatively small expense at the outset of your property ownership journey, title insurance is the prudent way to go.