What is title insurance?
Title insurance is a policy of insurance that provides coverage for the title-related* risks associated with real estate transactions. It is designed to cover the unpredictable or undetectable issues such as forgery, fraud, undiscovered restrictive covenants, missing heirs, etc. that can affect rights of ownership.
*Title is a term that refers to the ownership of a bundle of rights that its owner has in a property. If something is registered “on title” it means that it is officially registered against the property through the Land Titles Office or Housing and Land Use Regulatory Board, where property ownership is recorded.
Because it is insurance, a title insurance policy moves the risk associated with the title from the homebuyer, the lender, or the lawyer, to the title insurer.
If there is a problem with the title that only becomes known after closing, the title insurer may rectify the problem or compensate the title insurance policyholder, provided the type of problem that surfaces is covered by the title insurance policy.
The premium for title insurance is paid only once when you buy the property. You can also buy it later, but before any issues with the title are uncovered.
Types of title insurance policies
Title Insurance policies can typically be broken down into two basic categories:
Lender Policy. This policy is normally taken at the request of the lender upon closing a refinancing transaction. These policies may provide coverage to both the lender and the homeowner, which is recommended.
Homeowner’s Policy. This policy is normally taken by the new homeowner when purchasing a property; however, title insurance can be purchased at any time during the homeowner’s ownership of the property.
Making a Claim on a Title Insurance Policy
To make a claim on a title insurance policy the insured (the homeowner) must complete a statement of loss and submit it to the title insurer promptly. The title insurer will provide assistance in completing the required documentation.
Why do you need title insurance for your property?
Let's take an example: you bought a one-storey house right by the lakeshore planning to build a second floor to have a better view of the lake and rent it out for vacations. Little did you know that your building has a restrictive covenant that prevents you from doing it. The restrictive covenant* was put on your parcel of land 40 years ago as the previous owner had the land where both your building and the building behind fit. When retiring that person split his parcel of land and lived in the building behind you. When selling the land parcel closest to the lake he put a restrictive covenant that a building on it may never be above 1 storey to make sure he has a view of the lake. When you were buying the property the real estate agent and layer failed to spot this. The title insurance can help with this if you are able to prove you did not know about this restrictive covenant.
Other types of undiscovered restrictions could be pipes, electricity wires under your house that you cannot touch, the commonly used path to the back of the house that actually belongs to the neighboring house, etc.
*A restrictive covenant is a restriction of use placed on the title of the"subordinate" property for the benefit of the dominant tenement. As with an easement, a restrictive covenant runs with the land and can only be extinguished through the agreement of both current owners of the dominant and "subordinate" tenements.
A Title Insurance policy typically protects against many risks associated with the title.
Defense of title
Fraud and forgery (including title theft, the registration of a fraudulent mortgage, etc.)
The unenforceability of the insured mortgage
Defects that would have been revealed by an up to date Survey
Errors in the Survey. A mortgage survey is generally conducted to determine land boundaries and building locations.
Legal services, including lawyer negligence, lawyer fraud, lawyer death, disbarment, or retirement
Defects in the title such as liens, executions, adverse claims, encroachments, unregistered easements, mortgages, and other encumbrances
Unmarketability of title
Hydro, tax, water, and gas arrears
Executions against prior owners
Condominium status certificates
Septic system violations
Work orders, non-conforming zoning
Restrictive covenants
Municipal work orders and permits
Unregistered hydro easements
Other risks that may be covered by the policy.
A Title Insurance policy will typically not protect against the following risks:
Title issues that arise after the policy date that were not present before (other than fraud and other covered risks)
Title defects that the homeowner was aware of and to which the homeowner agreed
Title defects that the homeowner was aware of and about which the homeowner did not inform the insurer
Environmental hazards, unless noted on the title
Legality or rents
Fire retrofit compliance
Costs of moving fences or boundary walls
Losses from failing to make a claim in a timely fashion
Other exclusions that may be included in the policy.
In summary, title insurance is not required, but a good-to-have type of insurance that can protect you from title-related risks. There are quite a few of them as you saw above. With older houses that have changed many hands the registrations on title may be in different government agencies and local municipalities. While the chances of something being wrong with your property are quite slim, it would be trouble to later find out about the inability to fully utilize and enjoy your property.