Question Box: What Is Title Insurance?

(The following information bulletin is from the Real Estate Council of Alberta and reprinted with permission)

Summary: Title insurance policies protect the insured against losses arising from some title related and non-title related matters, but it is not the same as a Real Property Report and is not a replacement for a Real Property Report.

Consumers often purchase insurance policies for items that hold a significant value – homes, vehicles and the like. Title insurance is another type of insurance that provides some measure of protection for an item that has a significant value associated with it: the title to a property.

Title insurance and Real Property Reports (RPRs) are only related in so far as they both provide a measure of protection to buyers and sellers when buying and/or selling property, but they are not the same thing.

Title insurance works like a standard insurance policy, which protects against future discoveries about the subject property, some title-related and some non title-related.

A Real Property Report is a legal document prepared by an Alberta Land Surveyor that clearly illustrates the boundaries of a property and the location of improvements (structures), such as buildings, garages, sheds and fences, relative to property boundaries. An RPR with a stamp of municipal compliance is critical protection for all parties in a real estate transaction as it confirms the property improvements comply with municipal regulations.

Title Insurance Benefits

Title insurance can benefit the lender and/or the property owner. The benefits include the following:

  • The policy has a duty to defend the insured’s interest in the property (e.g. fraud, forgery);
  • There may be coverage of some non-titled items (e.g. building permits);
  • It provides gap coverage between submission and registration of documents at the Land Titles Office; and,
  • It may facilitate the transaction when a current RPR is unavailable or municipal compliance issues cannot be dealt with in a timely manner.

When is Title Insurance Required?

Unlike Real Property Reports, title insurance is not required as a result of any clause or term in the standard purchase contract used in Alberta or in the Real Estate Council of Alberta’s Seller Brokerage Agreement. A buyer’s decision to purchase title insurance in a real estate transaction does not absolve the seller from the requirement to provide a Real Property Report (RPR) to the buyer, unless the parties otherwise agree.

If title insurance is purchased at the time of closing the real estate or mortgage transaction, the buyer/borrower can acquire it at a lower premium. If the lender is buying title insurance for its purposes, the buyer/borrower may also purchase a title insurance policy at that time for a lower premium. If the buyer/borrower purchases a title insurance policy after the transaction has closed, the premium is greater.

Title insurance can also provide “gap coverage” for buyers and borrowers to protect their interests in the transaction while facilitating the closure of the transaction. There is often a gap of several days between the submission of the land transfer and/or the mortgage document to the Land Titles Office and the registration of these interests on the title. Typically, the lawyer cannot release mortgage funds to the seller until registration is complete and the title shows no intervening registrations. A title insurance policy can be arranged quickly, takes effect on the date issued and assures the state of the title at date of registration of the land transfer (real estate trade) or loan document (mortgage deal).

A title insurance premium is a one-time fee and is not added to the amount of the mortgage. The lawyer in the transaction can review title insurance options with the buyer or borrower and make arrangements for a policy. Should buyers or borrowers have questions regarding title insurance, it is important that the real estate and mortgage brokerage industry professionals refer them to a lawyer. If a buyer or borrower wishes to purchase title insurance after the transaction has closed, he or she can contact title insurance companies regarding their policies.

Although some lenders require a RPR with municipal compliance, some lenders accept a policy of title insurance from an approved title insurance company in its place. However, if the lender requires a title insurance policy as part of the transaction, the policy is for the benefit of the lender and does not cover the borrower. That coverage comes through an owner’s policy. A title insurance policy is only valid for the lender or owner who is specified as the insured. As with all insurance, there are exclusions to coverage. Those contemplating the purchase of title insurance should be clear on the risks coverage, as well as the limitations and exclusions specified.

Types of Title Insurance

There are two types of title insurance available in Canada:

  • Policies for lenders with mortgages registered on title, including new mortgages and refinanced mortgage; and,
  • Policies for owners, including newly purchased property and currently owned property.

Lender Policy

A lender title insurance policy is for the sole benefit of the mortgage lender. This type of title insurance provides protection regarding the priority, validity and enforceability of the mortgage. The system of land registration in Alberta helps create a sense of security because its accuracy is supported by the Land Titles Assurance Fund under the Land Titles Act. A title error on the part of any professional (lawyer, real estate professional, etc.) involved in a real estate or mortgage transaction may also have professional liability coverage, but those types of claims typically rely on a finding of fault or negligence.

Title insurance operates on a no-fault basis. Such insurance policies provide compensation to the insured party for certain losses regardless of the fault that gave rise to the claim; payment of a claim is not dependent on finding fault. Title insurance also protects the insured from title fraud or forgery.

Owner Policy

An owner’s title insurance policy protects the property owner. In this case, title insurance may relate to coverage for title and non-title issues, though any known issues or defects regarding the property’s title or non-title items must be disclosed to the insurer prior to acquiring a policy.

RPR and Title Insurance Differences

Title Insurance Real Property Reports
  • Not required in Alberta
  • Standard residential purchase contract in Alberta requires the seller or the seller’s lawyer to provide an RPR to the buyer or buyer’s lawyer
  • Is an insurance product that cannot fix problems, but rather provides financial protection if problems arise in the future
  • Provides information about property compliance issues upfront, allowing issues to be dealt with before closing (an RPR with a stamp of municipal compliance is critical protection for all parties in a real estate transaction)
  • May cover internal non-compliance issues that would never been shown on an RPR (such as lack of building permits or failure to meet building code on renovations such as basement development) and may cover hidden deficiencies such as underground storage tanks
  • Does not provide any sort of insurance coverage/financial protection – the goal is to avoid having problems arise via an RPR with a stamp of municipal compliance

Title Insurance Application Examples

  • Title fraud or forgery example. Sydney owns a residential property with clear title. This means he does not have a mortgage registered on the title. Arnie applies for a mortgage on the residence representing himself to be Sydney. Arnie forges Sydney’s signature on the mortgage documents and the mortgage is registered on the title. Arnie then receives the mortgage funds and subsequently leaves town. However, Sydney is faced with a mortgage registered against his property. In this case, if Sydney has title insurance it may cover any loss or damage due to the fraud or forgery, including any costs to defend Sydney’s interest in the property.
  • An example of a non-title defect. After moving into the house he recently purchased, Max received a notice from the municipality requiring him to obtain a building permit for a family room addition that was built without a permit by the previous owner. Concerned, Max hired a contractor to inspect the addition. The resulting report stated that the addition needed to be demolished. In this case, title insurance may cover the cost of demolition and the loss of property value or the cost of reconstruction.
  • An example of an unknown municipal compliance issue. Cindy purchased her first home which included a large rear deck off the kitchen that was built by the previous owners. After moving into the property, she is notified by a utility company that they must repair an underground service and will be digging along their utility right-of-way. Much to her surprise Cindy discovers that a portion of the deck was built over their utility right-of-way, creating an encroachment. This portion of the deck must be removed to allow for the excavation to repair the underground service. In this case, an owner’s title insurance policy may cover the owner’s cost for the forced removal of the encroaching structure.
  • An example of a known municipal compliance issue. Norman decides to buy a house with a large two-car garage off a back lane. Carl, the current owner, discloses that the garage was built too close to the rear lane, creating an encroachment on municipal property. To facilitate the sale, it may be possible for the seller and the buyer to agree to the seller providing title insurance in lieu of, or in addition to, providing a RPR. The buyer may accept title insurance with the understanding that the insurer can refuse to pay the claim should the situation arise. However, the encroachment must be disclosed to the insurer prior to purchasing the policy.

Land Titles Assurance Fund

Alberta’s land registration system uses the Torrens System of land registration and operates pursuant to the Land Titles Act. Under this system, the Alberta government has custody of all original titles, documents and plans and has the legal responsibility for the validity and security of all registered land title information. Additionally, the Alberta government guarantees the accuracy of the title through the internal application and enforcement of laws derived from a multiple statutes and court decisions.

An Assurance Fund has been established to provide compensation to anyone who has been deprived of an interest in land as a result of the operation of the Land Titles Office.

Anyone who suffers a loss due to an error on the title or even as a result of a fraudulent transaction may take steps to obtain compensation from the government through the operation of the Assurance Fund. For more information about that Assurance Fund, contact Service Alberta.

(The preceding information bulletin is from the Real Estate Council of Alberta and reprinted with permission)

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