My lawyer says the lender requires me to buy title insurance. What exactly is title insurance?
Title insurance protects owners and lenders against losses that may be suffered due to fraud, defects, and encumbrances related to the legal title of real estate. In simpler terms, if the legal title to your real estate is not what you thought it was and you suffer a loss, title insurance may cover that loss, if it falls within the coverage purchased. Examples of the protection offered by title insurance policies include the following:
· Title fraud such as forgery, incapacity, or impersonation;
· Easements and encroachments disclosed by surveys done after closing;
· Liens against your property as a result of unpaid debts from previous owners;
· Liens arising from unpaid taxes; and
· Zoning non-compliance where the property use doesn’t meet the municipal by-laws.
At the same time, it is important to acknowledge the limitations of title insurance policies. Examples of losses not covered by title insurance policies include the following:
· Environmental matters;
· Matters created, allowed, or agreed to by the insured (i.e. the owner or lender);
· Overvaluation of the land; and
· The exercise of governmental power.
Most lenders in British Columbia require the borrower to purchase title insurance when buying or refinancing real estate. However, a lender’s only title insurance policy only benefits the lender and not the owner. Coverage can be extended to owners as well and it should be carefully considered because the cost of extending the coverage is low relative to the cost of the lender’s only policy. As the following example illustrates, extending coverage to the owner when the lender requires a title insurance policy is a no brainer.
An individual purchased a residential property in B.C. for $200,000 and obtained a mortgage in the amount of $180,000. The individual invested a considerable amount of money in renovating the property. The prior owner then claimed the transfer was fraudulent and the purchaser was forced to reconvey the property back to the prior owner. Neither the new purchaser nor the prior owner obtained title insurance. The prior owner was required to incur the cost of applying to court to have the property transferred back to him, while the new purchaser was unable to recoup the money spent on renovations. The lender did acquire title insurance so paid the lender’s legal fees related to the insured mortgage.
Even if an owner is purchasing real estate without borrowing, title insurance may still be a good idea. Most importantly, title insurance is a one-time cost as the policy provides coverage for the entire duration that you own the subject property.
The types of losses covered by title insurance can be costly, especially in the Lower Mainland where real estate prices have skyrocketed in recent years. Given that title insurance is a one-time cost, it is generally a good idea. There are only a handful of insurers offering title insurance in British Columbia but there may be significant differences in the coverage offered. In addition, title insurance policies can have varying coverage (typically through the addition of endorsements). If you need advice deciding whether you need title insurance or selecting the right insurer and policy, we’d be happy to advise.