How does title insurance work?

If you’re buying a house or commercial property, the term “title insurance” may have popped up during the process. Like other insurance products, title insurance protects you from risks; but specifically related to the title of the property you’re purchasing.

But what exactly is title and title insurance? This article breaks down the two concepts and further explains what a policy covers, the different types of title insurance, the costs, and why you should purchase title insurance when buying a home.

What is title and title insurance and what does it cover?

A title designates your legal ownership of a property. You get a title when you sign transfer documents, and it’s registered in the government’s land registration system.

Title insurance protects you in case there’s a loss related to the property title or your ownership. For example, title insurance can compensate for any losses if your title mistakenly states the property covers an area that the neighbours actually own. Other circumstances where title insurance provides compensation include:

• Title defects where the ownership is vague;

• Existing liens against the property title, such as unpaid taxes, outstanding mortgages, or debts from utilities;

• Title fraud—i.e., someone forges title documents and takes a mortgage against the property; and,

• Errors in surveys and/or public records.

There are some areas that title insurance doesn’t cover such as:

• Native land claims;

• Environmental hazards such as soil contamination;

• Title defects that you were aware of during the purchasing process;

• Zoning bylaw violations; and,

• Issues usually covered by home insurance like damage due to fire or burglary.

Title insurance is available whether you’re buying your primary home, a cottage, investment property, or office location.

Cost of title insurance

The cost of residential title insurance depends on the value of your property. It usually consists of a one-time fee (referred to as a premium). Despite the one-time payment, coverage lasts as long as you own the property. It can extend to the beneficiaries of your will, through a divorce, or a gift to your children.

The different types of title insurance

There are two main types of title insurance: an owner’s policy and a lender’s policy. As the name suggests, the owner’s policy protects you from title-related losses, and the lender’s policy protects your lender in case your home’s mortgage becomes invalid or unenforceable.

Commonly, your lender mandates a lender’s policy. This reduces the risk that your lender may not have a property to claim in the event of default because you never received a good title.

Title insurance for the owner, however, is usually not mandatory and is a choice made by you, your family, and your lawyer.

Should you buy title insurance? 

It’s generally advisable for anyone purchasing a home to also purchase an owner’s policy. Properties are expensive. The risk of budgeting a house, cottage, or office purchase only to discover there remain unpaid liens and taxes may be disastrous. Title insurance reduces the surprises related to property ownership.

Although your real estate lawyer performs numerous administrative checks to ensure you have proper and complete legal title, mistakes can occur. Title insurance can also be an alternative to some of these searches but cannot fully replace the services of a lawyer.

Title insurance is an important policy to have when buying a home. It can protect you from expensive surprises after purchasing a property. Make sure to check with your lawyer and real estate agent for more information on its benefits.