I often have real estate clients ask me the following questions:
1. What is title insurance and why is it important when purchasing or selling a residential or commercial property?
Title insurance is a onetime insurance policy that protects against future discoveries about the subject property, some title related and some non-title related. Title insurance can benefit the lender and/or the property owner. The benefits of title insurance include the following, among other things:
- The insurer has a duty to defend the insured’s interest in the property (e.g. fraud, forgery);
- It provides coverage for violations of municipal zoning by-laws and other issues of municipal compliance (e.g. building permits);
- It provides coverage for encroachments and easements that would have been disclosed by a new Real Property Report (RPR);
- It provides gap coverage between submission and registration of documents at the land titles office (e.g. liens); and
- It may facilitate the transaction when a current RPR is unavailable or municipal compliance issues cannot be dealt with in a timely manner.
2. Does title insurance cover any loss or damages due to title fraud and/or forgery?
To answer this question, let’s consider the following example:
Sydney owns a residential property with clear title. This means he does not have a mortgage registered on the title. Arnie applies for a mortgage on the residence representing himself to be Sydney. Arnie forges Sydney’s signature on the mortgage documents and the mortgage is registered on the title. Arnie then receives the mortgage funds and subsequently leaves town. However, Sydney is faced with a mortgage registered against his property. In this case, if Sydney has title insurance it may cover any loss or damage due to the fraud or forgery, including any costs to defend Sydney’s interest in the property.
3. Does title insurance cover costs associated with unknown municipal compliance issues?
For this question, let’s take a look at another example:
After moving into the house he recently purchased, Max received a notice from the municipality requiring him to obtain a building permit for a family room addition that was built without a permit by the previous owner. Concerned, Max hired a contractor to inspect the addition. The resulting report stated that the addition needed to be demolished. In this case, title insurance may cover the cost of demolition and the loss of property value or the cost of reconstruction.
4. Is title insurance required?
Unless the parties otherwise agree, title insurance is not required as a result of any clause or term in the standard real estate purchase contract used in Alberta or in the Real Estate Council of Alberta’s Seller Brokerage Agreement. As such, A buyer’s decision to purchase title insurance in a real estate transaction does not typically absolve the seller from the requirement to provide a RPR to the buyer.
Knowing this, it is my recommendation that buyers work with their realtor to make it a term of the real estate purchase contract for the seller to provide the buyer with a credit for the cost of title insurance.
5. What is the cost of title insurance?
The cost of the title insurance will depend on where you are buying, what you are buying, and the value of the property. Normally, a home under $500,000 will cost about $200-$275. As such, title insurance is a relatively inexpensive way to protect your title against a wide range of potentially costly issues and to provide peace of mind.