From TitlePLUS Today: Title Insurance – Not a Panacea for Due Diligence
Obtaining title insurance in connection with the purchase of property has become the norm to the point that title insurance is on most real estate lawyers’ standard checklist of items to use when acting on a real estate transaction. It is important to keep in mind that, while title insurance shields buyers from many of the major risks that can affect the ownership and/or future marketability of title to a property, it is not without its limitations. Even when title insurance is purchased, real estate lawyers must consider the unique aspects of the particular property being purchased and communicate with the clients to determine whether there are any concerns that warrant further investigation in order to protect the buyer’s or lender’s interests.
As with any other type of insurance policy, title insurance policies feature certain exclusions. Typical risks not covered include native land claims, environmental hazards and the buyer’s rights to change the use of the land or undertake renovations or construction. In light of these exclusions, consideration should be given to factors such as the geographical location of the property, the client’s intended use and any other matters of special concern to the client to determine whether additional searches or other risk management options should be pursued to protect the client.
It is also important to ascertain the scope of the client’s knowledge about the property, as this could impact the availability of coverage. Buyers need to understand that risks known to a buyer will generally not be covered. Therefore, if there is a particular problem a buyer is concerned about, it must be addressed by other means prior to closing.
Similarly, future changes to the property will not be covered unless additional coverage is purchased in relation to the intended future use of the property. So, for example, if the purchaser is buying vacant land, serious consideration should be given to taking steps to determine the zoning and whether any development restrictions exist in relation to the property. Less common searches such as a conservation authority search may also be advisable.
As well, the client should be advised of any exceptions contained in the policy that are specific to the homebuyers’ property. For example, minor utility easements or rights-of-way for a mutual driveway are normally shown as exceptions to coverage. Some exceptions may be significant in terms of the impact on the buyer’s ability to use and enjoy the property. This is particularly so if the buyer intends to change the property, even in minor ways, such as by adding a pool, deck or gazebo in the backyard or changing the garage located near the mutual driveway.
Also, some or all of these issues may be important to a lender being insured under a policy of title insurance. This is particularly true if the lender is a private lender who may be more involved with the development of the property than a typical institutional lender. A lender of this type may wish to have a zoning search conducted even if the title insurer does not require it.
TitlePLUS Legal Service Coverage generally protects purchasers and mortgage lenders for losses suffered because of an error or omission made by their lawyer in connection with the purchase and/or mortgage transaction insured under the policy. Legal Service Coverage goes well beyond the title and off-title risks that are typically covered under a traditional title insurance policy and therefore provides significant additional protection. In essence, errors and omissions insurance is provided for legal services relating to the transaction
In our experience, there have been a number of claims submitted involving defects in a property related to risks that are not contemplated in the policy. While it may seem obvious, it is important to ensure that buyers understand that if the problem is not a “legal problem,” it is likely not covered. It is useful to clarify that title insurance is not home warranty insurance, and will not protect homebuyers if, for example, the furnace dies or the basement floods.
While title insurance is generally a cost-effective alternative to obtaining a solicitor’s opinion on title, it cannot be said that title insurance covers all title and property-related risks without qualification. It is not a substitute for a solicitor’s duty to consider the potential issues that exist in relating to a particular property and to advise buyers of alternative options available to protect buyers against those risks. At a minimum, it is up to the real estate lawyer to help buyers understand the protection offered by title insurance in order to get an idea of which risks are covered and whether additional steps need to be taken to protect buyers’ interests against those risks.