If you are buying real estate, at some point in the process you will come across something called ‘Title Insurance’.  What is Title Insurance?  The purpose of this article is to outline what it does, why it comes up in the course of a real estate purchase, the different sorts of policies, and give you some guidance on which you should choose in the course of a residential purchase.

What is Title Insurance?

Title Insurance is insurance which protects against problems with title, that is, with issues related to the formal ownership of real property.  To explain this, we need to consider how land ownership works in Ontario.  Land, or real property, is different from all other sorts of property, for two reasons.  Consider something you have nearby for the purpose of this example, such as a pen.  The first difference is boundaries.  The boundaries of a pen are clear and obvious, where it meets the air, but the boundaries of land are not obvious, they need to be drawn by surveyors.  The second difference is permanence.  If you fed your pen through a woodchipper it wouldn’t be a pen anymore, but if you drop a grenade on a patch of land and it goes off the land is still there (albeit with a new hole.)  This issue of permanence means that we need to be sure we are buying land from the right person, who bought it from the right person previously, who in turn bought it from the right person before that.  This is called the chain of ownership.  In Ontario these chains stretch all the way back to the late 18th century if you care to look.  We solve both of these problems, boundaries and permanence, in Ontario today through the Land Registry.  Basically, surveyors go out and make a detailed map of an area, dividing it up into parcels, and then submit this map (called a survey plan) to a Land Registry Office for that area, which they keeps an electronic register of all the people or companies which have any right in each parcel the plan creates.  When you buy a piece of land your name is entered into the register as the new owner at the bottom, and any mortgage you have is added on as well.

Having covered this, how does Title Insurance fit in?  Title Insurance is insurance against problems with the title, problems with the rights as described on the register.  The reason this is useful is twofold: first, formal registration is not the only way one can acquire rights in land, and second, entries can be made onto the title register through fraud.  Now we can consider how these work.

First, rights acquired other than by formal registration.  The easiest one of these is what is called a matrimonial property right.  Imagine there is a property inhabited by a married couple, though only one of them is registered on title.  Under the Family Law Act the spouse not registered on title does have rights in the matrimonial home, even though he or she is not registered formally on title.  If you were giving a loan to the person on title, you would need to make sure that the other spouse consented to the loan, or else your right as a lender with a mortgage would not be enforceable against the spouse not on title.  There can also be rights, handed down through the old English common law, which are attached to a parcel of land from before its conversion to the current Land Titles System.  The risk of such things existing depends upon what sort of parcel you are buying.  If it is a condominium, this risk is nonexistent, because before a condo building is built there must be an application by the builder for something called Absolute Title, which extinguishes any previous rights.  If you are buying a rural parcel which was originally created 200 years ago, there is a much greater chance that some ancient rights exist.

Second, rights acquired through fraud.  This one is pretty simple.  If, for example, someone impersonates you to a bank, and takes out a mortgage in your name, gets it registered on title, and then disappears, Title Insurance will reimburse you to have the mortgage removed.

The exact nature of the protected interests will vary from one policy to the next, and this is not an exhaustive list, but rather a description of the two broad categories of risks covered.  If you have a specific question about whether your policy covers a specific circumstance, you should consult your policy documents or ask your lawyer.

Why does Title Insurance come up?

Title insurance is at this point a standard requirement of lenders granting mortgages in Ontario.  When you purchase a property your lawyer will pull the title register and examine it for any issues with title which could cause problems for you, and will make requisitions of the seller’s lawyer regarding them, such as that an existing mortgage be removed.  This only works for things which show up on the title register, and lenders don’t want to be caught out by things which don’t appear, such as survey problems, (lawyer’s do not typically order new surveys nor do they physically examine the land) or problems which could occur in the future, such as mortgage fraud.  Lenders want to be protected from such risks, and so have lawyers acting for the purchaser buy a title insurance policy, at the purchaser’s expense, to insure the lender against these risks.

What sorts of policies are there?

There are only two types of policy: owner and lender.  It is also possible to buy both.  If you have a mortgage, your lender will require a lender policy.  Sometimes they will require your lawyer purchase the policy and send them proof, other times they will purchase the policy themselves and simply take the cost out of the mortgage proceeds (so your lawyer will not get all the money you will owe back, since the bank spent some of it buying the policy.)  A lender policy will reimburse the bank for any issues with either the registration of the mortgage or the title in your name, so that should problems occur they are still able to collect on the mortgage.  From your point of view this means that if a title problem does occur you at least don’t have to worry about your mortgage, since the lender will be compensated for any losses suffered, though you will still lose equity value in the property.  An owner policy protects your interests more directly, and will pay to defend your title rights in court if challenged.

Should I get Title Insurance?

This very much depends upon the circumstances of your purchase, and must always be weighed against cost. For a resale home (i.e. not from a builder) worth between $200,000 and $500,000 a single policy (owner or lender) costs $180.  Over $500,000 costs an additional $0.77 per $1000 of cost.  The second policy costs $52 regardless of property value.  For condos it is $88 for $200,000 to $500,000, then $0.77 per $1000, and again $52 for the second policy.  New homes are $139 for those $200,000 to $500,000, then $0.77 per additional $1000, and $52 for the second policy. For a refinance it is $118 for anything from $50,000 to $750,000, then $0.77 per $1000.  Please note that sales tax at 8% is payable on these policies.

One of the biggest factors to consider when deciding to get an owner’s policy is ironically whether or not you have a mortgage.  If you have no mortgage you are a much better target for mortgage fraud, because you have more equity to steal.  A large charge on your property means that banks will not offer much additional credit, since there is only limited remaining equity.

Whether you get Title Insurance ultimately depends on how you feel about the cost against the risks and the probability that anything covered will occur.  Title Insurance is best thought of as insurance against the small chance of a big problem, since there are very few small problems with title (nobody is committing $500 worth of mortgage fraud).  A guide to how likely Title Insurance is going to be useful is actually the price of the policy.  Insurers have a great deal of data on the probability of risks, so if the policy is more expensive that is because they have reason to believe a covered risk will one day require payment.

Additional Policy Options

Some title insurers, such as Chicago Title, the insurer commonly used by Bryan Rowe, offer optional additions to insurance policies, allowing you to customise your insurance.  There are two optional policy additions: Transaction Protection Endorsement and Increased Policy Amount Endorsement.  The Transaction Protection Endorsement can be added onto a lender policy, an owner policy, or both.  It is a protection against errors, either by your lawyer or the lawyer for the seller, which harm your interests.  The cost is quite modest, at $25 if attached to a single policy, and $30 if attached to two.

The Increased Policy Amount Endorsement applies only to owner policies.  A standard owner policy covers up to 200% of the value of the policy at purchase.  That may sound like a lot, but whether or not it is depends on how long you plan to own the house, and the rate of inflation.  The insurance policy is based on what is called ‘nominal value’, meaning the value as stated at the time it was issued; it does not adjust for inflation.  This means that if your house increases in value with inflation, and inflation is at 3%, after about 23.5 years the house will have nominally doubled in value, but in real terms (because the price of everything else increased as well) its value has not changed.  This means that if there is a total loss even if the policy pays out it may not cover the current real value of the property.  The Increased Policy Amount Endorsement removes the upper limit on the payout of the policy, and increases the cost of the policy by 10% (50$ minimum) if purchased at the time you buy the house.  This policy is most useful if you intend to reside in the property for a very long time, or expect the property value to more than double in the time of your ownership.