The Importance of Title Insurance  

publication 

Fall 2009 - (Lang Michener LLP Corporate Insurance Brief)

Lang Michener LLP Corporate Insurance Brief Fall 2009 and Insurance & Reinsurance, International Law Office web site, June 2009
Introduction

With the economic slowdown reducing real estate values, lawyers for purchasers and vendors of real property are spending more time on the basics. Specifically, title insurance is the focus of renewed attention as parties want to ensure that their interests are sufficiently protected. Many commercial lenders and owners of real property are concerned with their title insurance protection. In addition, many observers expect that claims and complaints against lawyers and title insurers regarding title will rise significantly during the current economic downturn, as they did in the early 1990s. 

The advantage of title insurance as part of a commercial property purchase or loan is that the insured can look to another party — the title insurer — to compensate for any losses. In addition, a title insurer's obligation to defend the validity of the mortgage and the title of the owner can be a material financial benefit. Accordingly, in commercial transactions where title insurance seems appropriate (e.g., where there are issues that need to be insured over, lender requirements, closing gaps and survey issues) there is the added benefit of title insurance coverage over many claims. 

Commercial property owners, lenders whose loans are secured by such properties and lawyers doing business in Canada are all advised to familiarize themselves with title insurance provisions, particularly as commercial realities have changed Canadian title insurance offerings over the last several years. 

Title Insurance

A title insurance policy is an insurance contract entered into between the title insurer and the lender on or purchaser of real estate. Similar to any other contract associated with a commercial real estate transaction, a title insurance policy needs to be in place at the time of closing the purchase or loan. When obtaining title insurance coverage, it is essential to ensure that:
  • the lender or property purchaser receives and understands the insurance coverage, including the contractual commitment;
  • all pre-conditions are met, the premium is paid promptly; and
  • the policy is reviewed to ensure that it has the correct provisions, exceptions and endorsements.
Commercial title insurance policies are of indemnity only and do not provide a guarantee. Typically, this is relatively effective for lenders interested in recovering money that has been lost due to a defect in title (although title insurers do not protect against falling market prices). However, it is less effective for a commercial owner that expects to be able to use and enjoy a property as it anticipated. For example, if a title insurance policy states that the existing use of a property consisting of a store and a 20-car parking lot may be lawfully continued, yet 10 of those parking spaces are unlawful, a title insurer can choose simply to compensate the policyholder for the difference between the value of the property without the title defect and the value of the property with the defect.

Commercial Owners' Title Insurance Policies

Commercial owners' title insurance policies typically provide coverage for the title to the property that has been vested in the policyholder. There are no encumbrances on title, the policyholder will have access to the property and the policyholder will have marketable title. 

The following improvements on coverage have recently been added to new commercial owners' title insurance policies:
  • Survey coverage is now provided within the standard policy. However, the policy should be carefully examined as such coverage is unavailable for policies above certain dollar thresholds.
  • Express coverage is now provided in respect of government power, expropriation and insolvency matters, due to a number of US cases that held that exceptions to exclusions may not provide coverage.
  • Gap coverage is now provided within the policy itself, as opposed to within an endorsement.
  • The definition of 'insured' has been expanded to include successors in title, partners, shareholders and grantees in reorganizations. This wider definition handles most potential future corporate restructurings and dramatically reduces the need for 'additional insured' endorsements.
  • The definition of 'unmarketable title' has been expanded to include lessees and lenders refusing to lease or advance.
  • The claims procedure has been simplified.
  • Co-insurance and apportionment provisions have been eliminated, dramatically reducing the need for an 'additional insured' endorsement.
  • Insureds are now provided with additional compensation rights to cover situations where the title insurer unsuccessfully litigates to protect title.
Commercial Lenders' Title Insurance Policies

In addition to the four owners' coverages noted above, commercial lenders' title insurance policies typically provide the four traditional loan coverages:
  • validity and enforceability of the mortgage;
  • priority of any lien over the mortgage;
  • priority of the mortgage over construction liens in certain circumstances; and
  • validity or enforceability of any assignment of the mortgage.
As with commercial owners' title insurance policies, new commercial lenders' title insurance policies have expanded their coverage provisions applicable to a loan policy, including:
  • a broader definition of 'insured';
  • a simplified claims process;
  • positive coverages instead of exceptions to exclusions;
  • unmarketable title including lessees and lenders;
  • gap coverage and survey coverage; and
  • increased compensation where the insurer litigates and loses.
Further, commercial lenders' policies also tend to:
  • include an expanded definition of 'indebtedness';
  • delete the provision which reduces coverage by any repayment of a loan; and
  • delete the provision which gives an insurer the right to reduce the amount of insurance by paying off a prior charge.

Endorsements

Title insurers offer additional endorsements beyond the basic policy. Insureds are advised to consider their business needs and the nature and circumstances of the transaction when assessing endorsements, as there are some broad categories of endorsement that can help to solve commercial problems in a transaction. 

Access endorsements

The first category of endorsement is those that deal with the locations of the property, access and services: for example, a restaurant that wants to ensure that its drive-through facility will be accessible. In this situation, a zoning endorsement should be obtained under both the owner's and the lender's policies. This will address the business needs of both the owner and the lender. <br>

Identity endorsements

The second category of useful endorsement is those that help to clarify the identity of the insured owner and cover for future variations. This is not much of an issue for the loan policy, as the insured in a loan policy is defined to include "each successor in ownership of the indebtedness" — so each assignee of the mortgage will be covered. The broader definition of 'insured' in the new commercial policies covers most restructuring situations. Insureds should check that it covers all reorganizations anticipated by the insured commercial owner. 

Aggregation endorsements

The third category of endorsement relates to the value of the properties covered. While the new commercial policies make the issue less of a concern by deleting the co-insurance provision, there are still circumstances where a group of properties is insured where an aggregation endorsement, which totals the values on all the issued policies and permits any claim to be made against an aggregate amount of insurance, will be useful. Not surprisingly, many endorsements issued by title insurers lead to the purchase of additional title insurance at a later date. There may be circumstances where a specific nature of use permitted and the location of the property give the property a unique value which would not exist on a different property. A 'going concern' endorsement would provide compensation for the value of the land as an ongoing operation. 

Title problem endorsements

The fourth category contains the variety of specific endorsements that should be considered to deal with various specific title or property problems. An insured may obtain a specific endorsement — most likely to be in the style of a marketability endorsement, a limited marketability endorsement or a future insurance endorsement — that deals with these title problems. 

Unique loan endorsements

The fifth category of endorsement that may arise is the set of unique loan endorsements that may apply to a lender's title insurance policy. While the standard title insurance policy is established to work with a traditional long-term mortgage paid out over an amortized period, unique loans should be supported by unique endorsements. Common examples of such endorsements relate to an assignment of rents, revolving credit and variable rates. Where a lender has special rights (e.g., arrangements to receive profits), customized endorsements will also be appropriate.

Policy form endorsements 

The sixth group of available endorsements relates to variations of the basic policy terms of each insurer. While the new commercial policies reduce the need for some of these endorsements as the policies are more 'user friendly', an arbitration deletion endorsement, a policy amendment endorsement or a creditors' rights endorsement to deal with policy form issues may still be useful. 

Gap endorsements

The seventh type of endorsement relates to one of the big advantages of title insurance — the ability to close and advance purchase or loan funds without waiting for registrations to be completed. This is particularly useful in a complicated transaction with multiple locations or closings in different jurisdictions. The gap endorsement can solve these problems. While the new commercial policies make such coverage standard in lenders' policies, this is not always the case in owners' policies. 

Government response endorsements

An eighth issue that may require an endorsement arises when investigations and enquiries are made about a property and the insured relies on the response of government bodies. In this situation, the insurer can guarantee the accuracy of the responses with a government response endorsement. This endorsement is often available, as the risk to the insurer is minimal if an appropriate public authority provides a written response. 

Specific endorsements 

Finally, specific endorsements should be considered where the property to be insured is other than a traditional fee simple purchase or loan. Specific endorsements that adequately deal with unique circumstances may often be obtained, such as condominium endorsements and leasehold endorsements.

Limits of Title Insurance

In the commercial context, title insurance is limited in its scope. It does not address a number of other legal and business issues that concern property purchasers, including:

  • environmental protection;
  • future expansion or changes in use;
  • implications of various municipal agreements and restrictions listed as exceptions; and
  • rights and obligations under commercial contracts such as coownership agreements, management agreements and leases.
While title insurance is a useful tool for commercial transactions, it should supplement and not replace legal services offered by a lawyer. 

Another limit of title insurance is the standard exclusion that addresses title defects known by an insured. Where the insured knows of a defect that is not registered, this defect will not be covered by the insurer. Where an insured is acquiring property in such a manner that it could be imputed to have knowledge from before the date of the policy, the exclusion will apply — for example, where one party is buying an interest in the property from a related party (e.g., a partner, former shareholder, subsidiary or joint venturer). While non-imputation endorsements may cover this situation, purchasers of property and their lenders should consider the facts and knowledge that they bring to a deal. 

Comment

As parties become increasingly concerned with business risks arising from a slowing economy, title insurance issues are likely to occupy the minds of more purchasers of real property and financers of these purchases. These parties are advised to:
  • review existing title insurance policies to ensure that they offer the correct protection;
  • consider their commercial needs and uses of a property before considering title insurance policies and endorsements;
  • review potential policies and endorsements to ensure that they provide the greatest protection for the parties' commercial needs;
  • negotiate for policies and endorsements that provide the greatest possible protection at the most reasonable premium prices; and
  • consult with a lawyer early in the process to ensure that their rights and interests are protected.
By Bruce McKenna