Failing to deliver title insurance opens up a number of risks
Hundreds of real estate malpractice claims find their way to LAWPRO every year. Some involve complex and exotic fact situations, but many do not.
At the heart of most claims is the lawyer’s failure to deliver something the client has requested or expected. Where the deliverable is at the heart of the deal − keys or money − the client will promptly draw the lawyer’s attention to a failure to deliver. Deliverables that are less connected to the client’s immediate needs, like a title insurance policy, are easier to overlook.
Failing to secure title insurance when instructed to do so is perhaps the easiest way to increase your risk when acting on a real estate deal. From the lawyer’s (and LAWPRO’s) perspective, it’s also emerging as a dangerous exposure.
Why? When a lawyer is asked to secure title insurance and doesn’t, he or she effectively becomes responsible for everything the policy would have covered, even if the range of insurance protection exceeds the normal standard of practice in the “opinion on title” world.
Consider a lawyer who makes a different kind of error — for example, assume we are in the “old days” and the lawyer forgets to search with the local municipality for building department work orders. The purchaser-client discovers post-closing that there is building non-compliance at the property, but no work order has been issued. In the Ontario conveyancing world pre-title insurance, that would likely have been the end of the matter in terms of the lawyer’s exposure: From a causation perspective, the lawyer is off the hook because there is no way the lawyer could have uncovered the issue by making the standard search.
But many title insurance policies cover a purchaser (and lender) where the non-compliance existed at closing and a work order is issued at a later date. In today’s world, where the lawyer is instructed but fails to secure title insurance, the alleged error becomes failure to obtain the title insurance and the non-existence of a work order as of closing becomes irrelevant.
How does title insurance get missed? Often in haste. One of the advantages of using title insurance to protect a deal is that it can permit shorter closing periods by eliminating some search-related delays. Rushing a transaction may mean that the title policy is applied for, but the deal is closed before the policy coverage is actually bound. If signs of a problem emerge after closing, the insurer may decline to proceed with the policy or insist on exclusions. After all, the insurer did not bind itself, in our example, to issue a policy.
This “error” is more likely in situations where there is uncertainty about the legal effect of the insurer’s response to the application. Title insurers vary in their procedures. An insurer may respond to certain applications for insurance by issuing the policy itself, such that it takes immediate effect on closing without the need for any other action on the insured’s part. Some lawyers may, by their own actions, be authorized to bind the insurer, provided they stay within the terms of their firm’s agreement with the insurer. In other cases, an insurer might issue a “binder” that provides temporary coverage pending finalization of the terms, disclosure of information, or satisfaction of conditions. An insurer may, for example, call this binding of coverage “pre-approval.”
After the coverage is bound, it’s common for insurers to require the insured (meaning, his/her lawyer) to take certain actions as a precondition to the negotiated coverage taking effect. For example, to secure TitlePLUS title insurance coverage, the insured is always required to submit the registration number for the transfer (or mortgage), so we know the deal was closed and registration occurred.
The dangerous claims mentioned above typically arise in situations where the client (whether the lender or the purchaser) has instructed the lawyer to obtain title insurance, the lawyer has taken the initial step of contacting the insurer about coverage, but then has failed to realize that the coverage has not been bound before closing. By “bound”, I mean a contractual agreement that allows the insured to insist upon issuance of the policy, subject to payment of the premium and satisfaction of clearly defined pre-conditions to issuance (if any).
What kinds of loss can this problem apply to? Consider, for example, an instance of identity fraud: A lender requests title insurance as a condition of making a mortgage loan, the lawyer undertakes to obtain the insurance, the mortgage funds are advanced, and it later comes to light that the “owner” who obtained the mortgage was actually a fraudster, and the real owner of the property has no knowledge of the mortgage transaction.
Before the advent of title insurance, a lawyer who handled a transaction that turned out to be based on identity fraud would likely not be liable for the loss if he or she had taken reasonable steps to guard against fraud (for example, checking the mortgagor’s identification). The essence of a good fraud has always been how hard it is to detect.
With the advent of title insurance, which provides coverage for fraud, the situation is markedly different: In instructing the lawyer to obtain title insurance, the lender is no longer relying on the lawyer’s reasonable efforts to investigate the identity of the borrowers — it is purchasing protection against loss regardless of flaws in that process. The risk of identity theft is intended to be moved to the insurance company. The lawyer’s failure to obtain the insurance is causally linked to the lender client’s loss, if the mortgage proves to be unenforceable.
Sobering? We hope so. But the solution is conceptually straightforward, if time-consuming on occasion: Follow through fully on title insurance instructions; be sure you understand the legal effect of the insurer’s response to the policy application, whichever insurance company you chose to deal with; consider before closing whether any conditions on the insurance binder or pre-approval are acceptable to you and your client, seeking instructions if necessary; comply with all conditions of coverage; and give the client prompt notice of issuance of the policy.
This article by Kathleen Waters (President & CEO at LAWPRO) originally appeared in the Oct 5 issue of The Lawyers Weekly published by LexisNexis Canada Inc.