Number 442, November 2010
Occasionally, claims are reported to the Real Estate Errors and Omissions Insurance Corporation (REEOIC) involving complaints by buyers against licensees which might not have been made if those buyers had bought title insurance.
Title insurance is an insurance policy provided by title insurance companies that protects residential or commercial property owners and/or their lenders against losses related to a property's title or ownership.
While each title insurer may offer slightly different coverage, some of the coverage provided by title insurance companies includes: coverage for unknown title defects; survey errors and errors in public records; losses related to improvements made without the requisite building permits (unless made by you); existing liens against the property's title for unpaid debts by the previous owner (utilities, taxes, mortgages or condominium charges registered against the property); real estate fraud and forgery; invalidity of mortgages; and encroachment and unregistered easement issues.
Title insurance will generally not cover known title defects1, environmental hazards, native land claims, matters created, allowed or agreed to by the insured, or matters known to the insured but not disclosed to the title insurer prior to closing (e.g. matters identified in a building inspection).
Title insurance is usually purchased by a buyer at the time of purchase, although it may be purchased anytime after. The insurance cost, generally a one time fee or premium, is usually determined by the property's value and depends upon the chosen provider.
The advantage to licensees of buyers purchasing title insurance is that it shifts liability from the licensee to the title insurer. Consider this scenario: an elderly seller owns a piece of property in a rural area for many years. After obtaining a variance from the governing authority, the seller constructs outbuildings which encroach upon the adjacent property. No record is kept of the variance by the approving authority.
Years later, when selling the property, the seller completes the Property Disclosure Statement indicating that he is unaware of any unregistered encroachments.2 The buyer discovers the encroachment after purchasing the property and incurs a loss in rectifying the issue. A buyer with title insurance would likely be indemnified by the title insurer for any proven loss associated with the violation. A buyer without title insurance would likely sue the seller and licensees involved in the sale to recover losses associated with the undisclosed encroachment.
Here are examples of recent claims paid out to BC homeowners by a major title insurer3:
- Buyer received notice from the City that the basement apartment was built without obtaining required development or building permits. A permit was required to remove or to legalize the apartment. Cost of claim: $239,958.
- Buyer had municipality conduct a site inspection of the property after experiencing plumbing problems. The inspector found numerous problems with the dwelling, as well as illegal gas and plumbing lines, and an unpermitted addition to the garage. The municipality issued an Order to Comply. Cost of claim: $270,797.4
To date, there is no standard industry practice to alert buyers to title insurance availability.
Given the protection that may be afforded to buyers (and indirectly to licensees) who purchase title insurance, licensees may well wish to advise buyers of its availability. This suggestion has already been made to real estate practitioners.5 For more information on title insurance see Legally Speaking issues 321, 322 and 323.
Real Estate Errors and Omissions Insurance Corporation
1.Title insurers often provide limited coverage to owners over many known defects which are disclosed prior to completion.
2.For example, associated costs of removing an encroachment as a result of neighbours' insistence.
3.Claims were covered by FCT Insurance Company Ltd.
4.Coverage for these claim examples were attributed to either lack of permits or work orders. It is important to note that a title insurer does not insure for building code or structural issues unless they are tied to a covered title risk.
5.Real Estate Update 2010, Continuing Legal Education Society of British Columbia, Title Insurance, Timothy J. Jack.
"Copyright British Columbia Real Estate Association. Reprinted with permission."