What is title insurance?
Title insurance works like a standard insurance policy. It protects against future discoveries about a property, some title-related and some non-title-related. It is a form of indemnity insurance for a mortgaged property that covers the loss of an interest in a property due to discovered legal defects.
As an insurance product, title insurance doesn’t “fix” problems. It provides insurance coverage for them. In other words, the title insurer has no obligation to do anything until a problem actually arises. When a problem does arise, the insurer can pay damages or actually fix the problem.
Title insurance operates on a no-fault basis. No-fault insurance is when the insurance company indemnifies the policy holder for losses, regardless of fault in the incident.
What does title insurance cover?
- title insurance can cover future title fraud (i.e. if through fraudulent transactions and paperwork, someone loses title to a property they legally own – title insurance can assist in getting title back)
- title insurance can provide “gap coverage” to buyers and borrowers, which protects their interests when a transaction is closing. 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 title. Lawyers cannot release mortgage funds to a seller until registration is complete and the title shows no intervening registrations. A borrower can arrange a title insurance policy quickly and it takes effect on the date of issue. It assures the state of the title at date of registration of the land transfer (real estate trade) or loan document (mortgage deal)
- title insurance may cover deficiencies that would not show on a Real Property Report such as unregistered utility easements or builders liens or matters that would be shown by non-Land Titles searches such as deficient corporate status
- title insurance may cover hidden deficiencies such as underground storage tanks or underground septic tanks. Sometimes coverage will include known defects, for example a fence in the wrong location or a deck that is too big for the property
Types of title insurance:
Owner's title insurance: This is a policy where either the buyer or seller may pay the insurance premiums to protect the buyer's equity in the property. This title insurance may provide coverage for title and some non-title issues. The purchaser of the insurance must disclose any known issues or defects regarding the property’s title or non-title items to the insurer prior to purchasing a policy. If you’re considering buying title insurance, make sure you know the covered risks, as well as the limitations and exclusions to coverage.
Lender’s title insurance: The borrower usually pays for lender’s title insurance even though it is for the sole benefit of the mortgage lender. This type of title insurance gives protection to the lender with respect to the priority, validity and enforceability of the mortgage. If your lender requires a title insurance policy as part of the transaction, that policy is for the benefit of the lender and will not cover you as the buyer.
Is title insurance the same as a Real Property Report (RPR)?
No. An RPR is a legal document an Alberta Land Surveyor prepares that clearly illustrates the boundaries of a property and the location of improvements, such as buildings, garages, sheds and fences, relative to property boundaries. An RPR with a stamp of municipal compliance shows a home buyer what he or she is buying and that it complies with municipal regulations. Title insurance is an insurance policy that protects against certain unknowns. Though they are not the same, both can provide some protection for a buyer.
Comparing title insurance and Real Property Reports
|Title Insurance||Real Property Reports|
|Not required in Alberta||Standard residential purchase contract in Alberta requires the seller or the seller's lawyer to give an RPR to the buyer or buyer's lawyer|
|Is an insurance product that cannot fix problems, but rather gives financial protection if problems arise in the future||Provides information about property compliance issues upfront, so issues can 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 do not show on an RPR (such as a lack of building permits or failure to meet building code on renovations) and may cover hidden deficiencies (such as underground storage tanks)||Does not provide any insurance coverage/financial protection – the goal is to avoid problems arising later by having an RPR with a stamp of municipal compliance|
For more information on Real Property Reports, check out RECA’s consumer tip.
Examples: How can title insurance help
- Title fraud or forgery: Sydney owns a residential property with clear title. His title shows no mortgage. Arnie applies for a mortgage on Sydney’s property by representing himself to be Sydney. Arnie forges Sydney’s signature on the mortgage documents and the lender registers the mortgage on title. Arnie receives the mortgage funds and immediately leaves town. Sydney now has a mortgage showing against his property. If Sydney has title insurance, it may cover any loss or damage from the fraud or forgery, including the costs to defend Sydney’s interest in the property
- Non-title defect: After moving into an existing home, Max receives a notice from the municipality requiring him to obtain a building permit for a family room addition the previous owner built without a permit. Max hires a contractor to inspect the addition. The inspection report recommends the demolition of the addition. Title insurance may cover the cost of demolition and the loss of property value or the cost of reconstruction
- Unknown municipal compliance issue: Cindy purchases her first home, which includes a large rear deck off the kitchen that the previous owners built. After moving into the property, the utility company advises Cindy that it needs to repair an underground service and will be digging along its utility right-of-way. Much to her surprise Cindy discovers that a portion of the deck is over the company’s utility right-of-way, creating an encroachment. She must remove this portion of the deck to allow the excavation that repair the underground service. An owner’s title insurance policy may cover Cindy’s cost for the removal of the encroaching structure
- 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 location of the garage foundation is too close to the rear lane. This creates an encroachment on municipal property. It may be possible for the seller and the buyer to agree to title insurance to facilitate the sale. The seller would purchase the insurance for the buyer 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. The seller must disclose to the insurer the encroachment prior to purchasing the policy