What should I know about Title Insurance?

Few topics have been more misunderstood and wrongly applied than the topic of title insurance and its value to the real estate industry in Alberta. Without a doubt, this product exists because it offers unique features that provide a benefit to both the transaction and the buyer. Unfortunately, many folks look at it like a simple fix to every ailment, and it simply is not. Although I am not a licensed insurance provider, for the sake of our members, I will take a few minutes to work through the high-level concept of title insurance in general and advise the reader to seek additional information from a licensed professional or lawyer.

Picking a product

Yes, title insurance is a product. It may come as a surprise, but just like your home or auto insurance, there are variations in coverage between policies and companies. Although there are fewer companies selling title insurance, there is variation across them. The most natural division is to split the product offering between policies for buyers and policies for lenders. As the name suggests, they are developed to cover different elements of risk based on who they’re for. Although there is some overlap between them, they are not the same thing. In many cases, for real estate transactions, the buyer may want or need both. As mentioned, though not all policies even within these divisions are the same across companies, and the coverages do change periodically based on risk, so a careful review of coverages prior to purchase is advisable.

Locked in time

One key element of title insurance compared to other types of insurance is this type of “frozen in time” concept. If you have car insurance, for example, it covers you against the possibility of a future accident; however, title insurance is not the same. Title insurance coverage crystallizes at the time of purchase, generally covering only things that may be discovered in the future but existed at the time of the policy purchase. There are a couple of exceptions of course, such as if someone tried to steal the homeowner’s identity at any time in the future and fraudulently attempted to take control of the title, which would be something typically covered. Most coverage is not for future events, only future discovery of existing or past issues that were not previously known.

Gap Coverage

Title insurance has two potential uses in a real estate transaction which need to be separated in the mind of REALTORS® and their clients. Title insurance is primarily a “gap” coverage product. This “gap” terminology refers to the time gap between the closing day, when all parties sign, the mortgage is funded, and keys are released, and the eventual day when the land titles finally register the new mortgage and owners on the title. This time, “gap” presents a risk because there is a potential for an intervening registration to slip in on the title, which could affect the lender's position of primacy. Title insurance provides security to the lender (through the lender policy) that if all proper legal underwriting procedures were followed, then the title insurance policy will cover that rare circumstance and secure the lender's position. Although this article focuses on title insurance, it is essential to note for the reader that in Alberta, an alternative gap coverage is provided by the Law Society of Alberta, which is free and available to all lawyers in most transactions. This is called the Western Law Societies Conveyancing Protocol, or “Protocol closing” for short. This protocol option is free and accessible to all lawyers when appropriate for the transaction, accomplishing the gap coverage that lenders need without the cost of an insurance policy.  

Real Property Report (RPR) Replacement

Nope. Title insurance is not a replacement for a current RPR with evidence of municipal compliance or non-conformance, as the standard AREA purchase contract requires. As I have written in detail about real property reports in other articles, I won’t go down that rabbit hole here. Suffice it to say that a current RPR with that compliance or non-conforming status is the most secure way for a buyer to know what they are buying before they own it. The reason I am bringing RPRs into this discussion is that this is the second way a title insurance policy is used in real estate transactions. When buying a property, the buyer and the lender want verification that what they are buying and lending on is not going to have any unforeseen property issues that could cause the buyer problems or even result in a loan default. For this reason, they want either an RPR with compliance or some other coverage for potential risks that an RPR would have otherwise discovered if it were obtained. Title insurance in this case can help mitigate the risks resulting from the lack of an RPR, or even a current RPR, for both the buyer and the lender, where they are unaware of any existing issues. What title insurance does not do is replace the other benefits of an RPR with compliance, such as confirming the physical location of improvements. However, it only covers the risk of what could be discovered in the future when an RPR is inevitably created. Because the RPR and title insurance both serve different purposes, quite simply, the best option is to use both!

Double Duty

One of the key reasons why title insurance is blended in the understanding of Realtors® and their clients is that in situations where there is no current RPR and the parties agree to use a title insurance policy to cover that risk. That same policy may cover the gap coverage situation as well. Remember, the policy covers risk and does not solve all problems but can pragmatically help facilitate these two functions under the same policy, thereby doing double duty.

Despite the brevity of this article, I hope I have been able to help clarify some misconceptions about title insurance and even prompt you to do your own research into the numerous benefits and coverages. The reality of the situation is that title insurance does serve a valuable purpose in the real estate industry. Still, it is not the magic bullet that slices, dices, and waxes your car like some late-night infomercial product that solves all your problems. Buyers need to have a basic understanding of their options and then seek out the advice of a legal professional for their specific situation regarding the coverage they need.