WHAT IS TITLE INSURANCE AND HOW DOES IT WORK?

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1 .. ":J -. WHAT IS TITLE INSURANCE AND HOW DOES IT WORK? These materials were prepared by Randy Baker of Kanuka Thuringer, Regina, Sask. for the Saskatchewan Legal Education Society Inc. seminar Real Estate for Legal Support Staff November, 1997

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3 WHAT IS TITLE INSURANCE AND HOW DOES IT WORK? Title insurance is not one thing. Title Insurance is the assumption of risks falling under many different categories. ""j Examples of categories where title insurers are assuming risk are as follows: Land Titles Office registration delays Defects in Title Zoning infractions Subdivision infractions Absence of surveyors certificates Prior encumbrances Fraud or forgery by a borrower Priority of Builders liens Priority of unregistered easements and rights of way WHO IS PROVIDING TITLE INSURANCE? At the present time the only known companies providing title insurance in Saskatchewan are First American Title Insurance Company ("FATIC" and its subsidiary, First Canadian Title Company Limited ("FCTC". Other companies are registered with the Province but are not presently active in marketing their products. -J U 'c, WHO HAS ACCESS TO TITLE INSURANCE? A. LENDERS Lenders have access to title insurance through direct relationships with title insurance companies. The title insurance company will provide Land Titles registration services for a lender after the lender prepares its mortgage security in-house (or has it prepared by the title insurance company and has the mortgage signed by the borrower.

4 2 Upon receiving the signed mortgage from the lender, the insurer will issue a policy insuring against problems arising from delay in registration, zoning imperfections and survey irregularities. Upon the policy issuing the lender can immediately advance funds to the borrower before registered documents are returned from the Land Titles Office. Upon the mortgage documents registering at the Land Titles Office, the title insurance company provides a copy of the registered mortgage to the lender. It is unknown what other "opinions" the insurer provides to the lender (i.e. insurance, taxes, utility charges, etc.. :J B. BORROWERS Borrowers have access to title insurance in that they can buy a supplementary policy from the insurance company used by the lender at an additional fee to cover the same risks insured by the lender. HOW IS TITLE INSURANCE BEING USED? At this point the following information is available: Lenders are using title insurance in conjunction with ''waiver of survey certificate" programs Lenders are using title insurance as an option to requiring a surveyors certificate (the cost of the policy is $ for lender protection and $50.00 extra for borrower protection Lenders use title insurance for mortgage work associated with consumer lending (ie. second mortgages, line of credit mortgages where the mortgages are prepared in-house by the lender's employees or outside by the title insurer's employees. Title insurance does not appear to be in use by lenders on purchase money mortgages except as the insurance relates to surveyors certificates. Where title transfer work is involved, lawyers are still used > ~.J

5 3.., HOW DOES TITLE INSURANCE WORK Currently, title insurers do business in one of two ways - providing a product or providing a service. A PRODUCT The "product" category comprises the purchase of a policy by a borrower to replace a surveyor's certificate or by a lender to protect it under a ''waiver of survey" program. B. SERVICE The service category comprises the complete packaging of transactions for the benefit of the lender as described earlier. If there are problems with building locations or in registration or with intervening registrations (i.e. writs, liens etc., the title insurer takes the risk and deals with those things at its expense. The problem is taken away from the lender. However, the problem still belongs to the borrower because title insurance is not protecting the borrower. The title insurer can solve the problem and then come back at the borrower to recover its costs or the title insurer can elect to do nothing and wait to see if any claim is ever made against the lender. SHOULD THE BORROWER BE PROTECTED? The fact that the policy does not protect the borrower is not wrong. It is likely that in applying for the loan, the borrower is asked if there are any writs or liens that will affect its title. If the borrower knows of such things and chooses not to disclose them, then the borrower has misrepresented its status to the lender and should have to pay for expenses which the borrower has forced on the insurance company. J J It is not as clear whether the title insurer would try to recover costs against an innocent borrower (e.g. a borrower whose property is affected by a writ against a similar name. It is unknown whether a title insurer would take any steps to clear up any problems of an innocent nature or whether they would just leave them on the title to be dealt with by the borrower in the future because the registrations pose no threat to the lender at the present time.

6 BENEFITS CLAIMED BY TITLE INSURANCE 4 FATIC claims the following benefits in its document A Brief on Title Insurance Prepared for Solicitors (April 1, 1995: "1. Protection against loss or damage for matters for which there is no entitlement to compensation under the Land Titles Assurance Fund. 2. Broader coverage than that available through a lawyer's opinion. 3. A no fault method of dispute resolution without need to prove solicitor negligence to obtain financial recourse. ~ } 4. No concerns about the amount of liability insurance a solicitor carries. This eliminates a lender's need to maintain an approved lawyer list. 5. Protection against loss or damage for problems that would have been disclosed by an up to date plan of survey, without requiring a survey, in most residential transactions. 6. The extension of policy benefits to any assignee of the mortgage, regardless of whether that assignment has been registered. 7. Policy issued within 3 business days of closing. 8. Protection against loss of priority to construction liens for purchasers of residential property and on certain mortgages. 9. The ability of First American to immediately underwrite title risks and in many cases accept risks which in effect 'clean up' the title and allow transactions to close in cases where a closing would have otherwise not been possible, or would have been delayed. 10. Automatic protection against loss arising out of zoning by-law infractions on all residential transactions. 11. Elimination of bridge financing in Western Provinces currently due to provincial registration procedures." FATIC also claims that lawyers can use title insurance in place of their opinions which then allows a claim to be handled on a "no fault" basis without negligence having to be proven against the lawyer. and omissions premiums on lawyers' liability policies. FATIC suggests this will have the result of lowering errors

7 5 PROBLEMS WITH TITLE INSURANCE """ 1. Removes Need to Solve Problems Title insurance "insures over" a problem and does not correct it. If a problem is discovered by a lawyer in a conveyancing matter, it will be resolved or the deal will likely not be completed. If the problem is insured, it can be ignored by the insured party. However, when the property is dealt with again, the problem will still exist. That will be motivation for title insurance to be used again. 2. Standard of Service It is not clear whether title insurers look after registering discharges of prior registered interests. The focus of title insurance is to allow lenders to lend quickly. The lender may be advancing money to payout prior loans registered on the title. If a lawyer was doing that, the lawyer would be requesting and eventually registering a discharge to remove the prior interest. It is less likely that a lender will care about the actual discharge because it will have a record of having paid out the loan. It is more likely that discharges will be sent by lenders directly to the borrowers for registration. The experience amongst real estate practitioners is that such discharges seldom end up being registered at the Land Titles Office since their significance is not understood by the borrowers. The other experience is, that without persistent followup, many discharges would not be provided at all. ~ U o The real problems will start to surface when borrowers decide to sell their property. The lawyer looking after the sale will be faced with chasing after discharges for closed out loan accounts. Will this work be covered as part of a lawyer's normal fees or will there be additional legal fees to a client to clean up old problems? 3. Claims Record The record on how title insurers payout or deny claims that are actually made is unknown. The potential is there for a policy holder to have to sue the insurer over a.

8 6 disputed claim. However, the same argument would exist if a lawyer was being pursued for negligence or the Land Titles Office Assurance Fund was being pursued for an errorcausing loss. 4. Incursion into Practice of Law The services provided by title insurers to lenders cut into work historically done by lawyers. 5. Cost to Consumer If title insurance is used in conjunction with legal services, consumer costs will rise. FATIC's printed material suggests that their policies can be used by lawyers in place of legal opinions and thereby reduce liability insurance costs. Just because a policy is obtained is no reason for a lawyer to adopt a lower standard of care in acting for a client. Although a title insurance policy may go further than a lawyer's opinion, there is no doubt that in all cases the lawyer's opinion and the title insurance will overlap in some areas. This has the effect of double payment by the consumer for the same protection. It is likely that the consumer will opt for one or the other but not both. 6. Risk to Legal Profession If a lawyer's client uses title insurance another reason the lawyer cannot do less is the fact that the policy insures the client, not the lawyer. In the event of a loss it must be considered that the title insurer could subrogate the rights (i.e. step into the shoes of its insured and sue the lawyer who provided services to their insured. WHO IS AFFECTED BY TITLE INSURANCE? 1. Lenders Lenders are affected positively by title insurance. in the lending process which may cause delay. Purchasing a policy eliminates steps Lenders, by preparing their own security documents, take on risk for themselves that those documents properly protect their interests. The insurer does not assume that risk.

9 7 2. Consumers Consumers are affected by title insurance by choice. protect their own interests or choose not to do so. They can purchase a policy to Consumers are affected negatively by title insurance by double costs if their lender insists on title insurance and the consumer still wants legal services. ':"J 1 Consumers may be mislead by what title insurance means unless they are educated to know that title insurance may only protect the lender and not the consumer. Will the consumer know a second policy is required or what the importance of declining such coverage will mean? Consumers may be able to obtain individual benefits by negotiating title insurance coverage to alleviate specific risks in specific transactions. FATIC provides examples in its printed materials of unusual situations where policies have been issued at negotiated premiums. 3. Lawyers Lawyers are affected negatively by title insurance in that it removes work traditionally done by lawyers. Whether it is work that can only be done by lawyers is an open question. Lawyers are affected neutrally by what FATIC claims is a positive benefit. FATIC claims that errors and omissions expense will go down for real estate related claims. That will only happen if FATIC does not use its subrogation rights to pursue lawyers involved in transactions where insured problems develop. 4. The Land Titles System Lawyers continually improve the accuracy and reliability of the registry by uncovering and correcting problems and errors which they discover. Title insurers may not be concerned with these improvements and may in fact benefit from leaving errors unresolved. Buying a title insurance policy may be cheaper than solving a problem.

10 8 H a title insurance company fails, where will consumers tum for relief? answer is the Assurance Fund under the Land Titles system. The likely 5. Surveyors Title insurance can replace the need for a Real Property Report or Surveyors Certificate. That is one of the main features in a title insurance policy taken out by a lender. It is not clear whether FCTC or FATIC review existing Surveyors Certificates as a precondition to issuing a policy insuring a lender. WHAT IS THE FUTURE? At this point in time, title insurance is not being used for "purchase money" mortgages. Those are the mortgages used to purchase real estate. Any problems with the actual title are (or should be dealt with as part of a purchase and sale. Perhaps title insurance companies do not want to take the risk of dealing with issues of title at the time of purchase. On the other hand, maybe they are getting lenders used to their services in the secondary financing area before moving into the area of purchase money financing. How the insurers would structure a system that made the money available as soon as the new title issued and the property had to be paid for is unknown but it is likely that they would figure out a way - provided there was profit in doing so. Another future possibility lies in the concept of "title plants". In some American jurisdictions, title insurers establish central record keeping sites to gather ongoing information about properties insured and reinsured. This has the potential to become a parallel system to our current land titles system. To help understand the effect that title plants would have, suppose there is a property that was covered by a title insurance policy. Then suppose a problem arose concerning that property after the title insurance policy issued - for example an encroachment of a building onto adjoining property. Once the problem was known, it could be dealt with by preparing and registering an encroachment agreement. That is what a lawyer would recommend J tj,

11 9 J ::> However, if no one is complaining about the problem it may be easier and more cost effective to do nothing. The insurer could just keep a record of that particular problem with that particular property. The problem might only become significant when the owner decides to sell the property or remortgage it in the future. Under our present system, a lawyer would not let a client purchase a property or allow a lender to advance mortgage money before solving the problem. With title insurance, the insurer can check its records on the property at its title plant, determine if it thinks the problem is significant to it and, if not, simply offer to insure over the problem again - probably upon payment of another premium. This means the insurer would only get involved if the problem ever became active. Money would not be spent to solve a problem that was not currently an issue. The problem could be put off indefinitely. The issue is whether that is a satisfactory way to deal with the problem. Lawyers would say no. Lenders would say yes. Property owners would probably be driven by which ever solution was cheapest. Eventually, the title insurers records kept at its title plant become as important as the Land Titles Office records. Buying a title insurance policy might become the only way or the cheapest way to get past the problem. The problem would not be fixed. Its effect would just be postponed. --J I.J d. J Title insurance has zeroed in on what are perceived as nuisance or annoyance issues to users of the Land Titles system. Registration delays which slow up the advance of funds by a lender to a borrower and the surveyors certificate and zoning compliance costs which add to the borrower's costs are the main targets. The LAND project may neutralize the need for title insurance to over come delays by providing short tum around times for registration. However, by then title insurance may have engrained itself into normal lending procedures at the financial institutions. The Law Society is monitoring the use of Title Insurance in Saskatchewan as is the Federation of Law Societies nationally. Ontario has decided to compete with title insurance companies by creating its own form of title insurance administered through its law society. Other jurisdictions are observing the Ontario experience before deciding whether to follow suit. Provinces with Torrens (Land Titles systems in place are not

12 10 in the same situations as Provinces with Registry systems. Under the Torrens system, the government guarantees owners they have title to their property. Under a Registry system, lawyers guarantee owners they have title to their property. Title insurance is a much bigger factor in jurisdictions using the Registry system. What will really determine whether title insurance endures is whether the lenders like how it works. The challenge to the legal profession is to find a way to compete effectively with title insurers and convince lenders that a lawyer's services add value to a mortgage transaction.