Title insurance is not an autopilot licence
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 responsible for explaining it to the public.
The most fundamental title insurance knowledge gap, as we see it, relates to scope of coverage. Title insurance is designed to cover defects in the title to property and not, generally speaking, problems with the condition of property. This is one of those distinctions that appears clear in theory but can be murky in practice. The murkiness of the issue is not helped by the significant variability in title insurance policies (we’ll discuss that a little farther along).
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.
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… which sometimes happens precisely because there is a title insurance policy… but the lawyer doesn’t understand the policy.
Non-title-related compliance problems are a good example of a murky coverage issue. 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. Undiscovered non-compliance with applicable compliance schemes is a risk for the purchaser, but it is not a title issue proper. However, some title insurance policies actually do cover losses related to, for example, violations of compliance schemes that have been registered against the property in some way, or of which the vendor had notice. This kind of coverage, though useful, can be confusing; especially where the covered violations relate to the condition of the property, and not to title.
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 cost of remediating the underlying non-compliant condition itself. The risk of buying a property subject to an undiscovered order or notice of violation is a quite separate – and more contained – risk than the risk of the actual non-compliant condition, which may be an expensive-to-fix problem with the condition of the property or the current use of the property… or the fact that the property is not fit for the purpose for which the purchaser is buying it.
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. However, the lawyer IS responsible for turning his or her mind to the possibility that there may be such problems, and for either investigating them through off-title searches (if so instructed), or for informing the purchaser of the potential for risks that might warrant other action – asking the title insurer to “insure over” a particular risk, perhaps, or requesting a holdback or price adjustment. Finally, if a client instructs the lawyer NOT to investigate non-covered risks, or if the results of off-title searches are inconclusive or ambiguous, it is the lawyer’s responsibility to advise the client that there is no absolute guarantee that the property will be fit for the client’s purpose. 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).
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 change their coverage over time in response to claims experience. It is also common for a provider to offer various grades or tiers of policies (for example, “bronze, silver, and gold” policies) that tailor coverage to the client’s budget. 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 thoroughly review policies arranged for commercial transactions.
The lesson? When it comes to title insurance, you may know less than you think you know. Don’t operate on autopilot. Review the chosen policy, determine what is important about the property to the client, turn your mind to potential uncovered risks, and recommend additional investigation, where appropriate.
This article by Kathleen Waters originally appeared in The Lawyers Weekly published by LexisNexis Canada Inc.