This article by Kathleen Waters, President & CEO of LAWPRO, originally appeared in the Feb 22, 2013 issue of The Lawyers Weekly published by LexisNexis Canada Inc.
Title insurance is one tool that purchasers can employ to reduce some of the risks associated with a real estate purchase.
This may not sound like “news” meriting coverage in a publication for lawyers. However, claims experience here at LAWPRO suggests that the function of title insurance is not fully understood by the bar – and that’s a problem, because in Canada, the bar is usually responsible for explaining it to the public.
The most fundamental title insurance knowledge gap, as we see it, relates to scope of coverage. Canadian residential title insurance is designed to cover defects in the title to property and legal compliance as defined in the policy, not problems with the condition of property, in general. It isn’t an all-inclusive home warranty. This is one of those distinctions that appears clear in theory but can be murky in practice and surprise some homeowners. And surprised homeowners often turn their dismay into anger at their lawyer, whether justified or not.
A related but not identical misunderstanding centers on the effect of the client’s decision to buy title insurance on the lawyer’s overall duties in the purchase transaction. More specifically, some lawyers seem to be confused about the extent to which title insurance relieves them of the duty to consider or recommend other risk-management steps. And you can’t make reasonable recommendations if you don’t understand the coverage in the title insurance policy.
Acting for the purchaser in a real estate transaction is, after all, primarily an exercise in risk management. Distilled down to common denominators, most purchaser-side claims that flow from title-insured real estate deals arise from a lawyer’s failure to consider or address risks that fall outside the coverage provided by a title insurance policy.
Different types of property are subject to different compliance requirements. For example, properties that will be used for commercial purposes are subject to different safety standards (for example, under the Fire Code) than are single-family residential units. Similarly, rental properties must comply with rent control legislation in many provinces. Some title insurance policies cover losses related to, for example, violations of compliance schemes that have been registered against the property in some way or that would have been uncovered by a search letter.
Unaddressed risks can lead to claims when a lawyer relies on the fact that the title insurance policy offers this kind of “violations” coverage, but the lawyer does not understand that this coverage does not extend to the risk of buying a property subject to an undiscovered condition if some part of the solicitor’s duty (outside of obtaining title insurance) could have given notice of the condition.
A reader might protest here that the lawyer is responsible for investigating title, and not for discovering problems that would only be revealed upon expert examination of the physical property or its operations. However, depending on the standard of care (and it evolves over time) the lawyer IS responsible for turning his or her mind to the possibility that there may be such problems, and for informing the purchaser of the potential for risks that might warrant other action – asking the title insurer to “insure over” a particular risk or provide a special endorsement perhaps or for the client to seek other expert assistance. A classic example in Ontario over the years has been rent control compliance. There may be no outstanding violation notice, but helping a client buy an apartment building without the client understanding the impact of illegal rents is a risky undertaking for the lawyer.
Finally, if a client instructs the lawyer NOT to investigate non-covered risks, or if the results of other inquiries are inconclusive or ambiguous, it is the lawyer’s responsibility in typical retainers to advise the client of the impact of the limitations given the purchaser’s intended use of the property. The lawyer’s duty to enquire about the purchaser’s intentions for the property and to recommend appropriate searches or inspections even in a title-insured transaction is clearly described in the Law Society’s “Residential Real Estate Transactions Practice Guidelines” (at Part 2: Due Diligence). Of course, whether or not an unhappy or nervous client then has recourse under the agreement of purchase and sale depends on the individual transaction.
In order to turn his or her mind to the advisability of additional risk-management steps, the lawyer must first, of course, understand the scope of coverage provided under the policy chosen. Title insurance policies vary from provider to provider, and providers have been known to change their coverage over time in response to claims experience. Policies for commercial real estate can differ substantially from residential policies (in general, they tend to offer less comprehensive coverage), and so lawyers who handle almost exclusively residential transactions should take care to review thoroughly policies arranged for commercial transactions. For a commercial transaction, the lawyer is more likely to have to build coverage up, through the addition of specific endorsements, than in a residential transaction. Particular searches and documentation may be required before a given endorsement is made available.
The lesson? When it comes to title insurance, you may know less than you think you know. Don’t operate on autopilot. Determine what is important about the property to the client, turn your mind to potential risks, review the proposed policy, and recommend additional investigation, where appropriate.