Title Insurance Versus Title Opinions – What’s Best?

Title insurance in the last few years has become increasingly popular for mortgagees of commercial properties. Not too long ago, only a title opinion would have been available. Now the parties must choose: insurance or opinion? What is the difference? Which is better? As described below, there are pros and cons with each, and neither is best in all cases.

Title insurance provides insurance against the risks specified in the policy, but a title opinion affirmatively assures good title. Less title due diligence is often conducted by a title insurer than by a lawyer issuing a title opinion. This is especially so on a loan policy, where the title insurer views its risk as two steps removed: there has to be both a default on the loan and a material defect in title. In Ontario, the Insurance Act still requires that a policy be backed by a "certificate of title" from an independent Ontario lawyer. However, in practice, this is often loosely interpreted and may not necessarily require that a current and full title opinion be obtained, backed by a current and full title search.

One of the merits of title insurance is that it covers some matters that are usually exceptions to a title opinion, such as forged documents, errors in the public record, errors of public officials and certain surveying errors. Title insurance can also cover the gap between closing and registration. In addition, title insurance has the attraction of being available to insure over known title defects, such as improperly closed roads, unused easements, misdescriptions, paid-off but still registered mortgages, expired leases and other matters that are legal or technical defects, but pose little practical risk. In this way, title insurance can be the key to getting a deal closed.

A title insurance policy for loans is generally good for the life of the loan and extends to successors and assigns, even if the loan is securitized. Indeed, title insurance is greatly favoured for mortgages that are or may be contributed to a securitization because rating agencies and investors are comfortable with their standardization and uniformity of coverage. On large loan transactions secured against many properties, especially if those properties are spread across the country, title insurance offers a speedy and uniform method of dealing with title issues that is not generally available if multiple lawyers in various jurisdictions are required to issue opinions.

In making a claim on a title insurance policy, compensation for loss is capped at the amount insured, is expressly limited in scope and does not cover increases in value as a result of market forces or property improvements (although there may be some allowance for increases from inflation). This is not the case for title opinions. On the other hand, title opinions are just that – opinions. The successful claimant must prove negligence, not merely an error, as well as reliance and damages caused by the error.

The cost of a title opinion largely reflects the time and expense involved in the title search. By contrast, the premium on an owner’s title insurance policy is a flat percentage of the property value (typically the purchase price). For a loan policy, the percentage is applied against the lesser of the property value and the loan amount. However, a full title opinion, rather than just a subsearch, may still be required by the title insurer as a basis for issuing the policy, especially in the case of higher-value properties. This can be a material added cost.

If there are municipal agreements, reciprocal agreements, easements and other similar encumbrances affecting title, both a title insurance policy and a title opinion will list them as exceptions to title. In both cases, the lawyer for the mortgagee will generally need to review those documents and advise of their impact on the transaction and on the property. Accordingly, title insurance is not necessarily more or less expensive than a title opinion. For a property having a high value, but with a "clean" title, a title opinion is likely to be less costly than title insurance and may offer more opportunity to make use of the invested time and cost in subsequent transactions.

Title insurance is becoming increasingly popular and widespread. However, in any given situation, it is important to consider the relative advantages and disadvantages, as described above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.