Extracts from "RESIDENTIAL TITLE INSURANCE"
written & presented by David R. Currie
Thoms & Currie, Huntsville, Ontario
Date: March 2003

OBA Institute of Continuing Legal Education 2003
"Real Property - After the Earth Quakes: The New Practice of Real Estate"

1. Title Insurance as a "Best Practice" in Completing a Residential Real Estate Purchase

1.1 Addressing client need through title insurance

If one steps back from the mechanics of completing a real estate purchase transaction, and examines it from the point of the view of the needs of the client, then it is easy to see it as an exercise in "risk management." The client enters into a transaction that carries with it certain risks and retains a lawyer to address those risks. Those risks might be that the property is not as represented, that there is a flaw in the legal interest that the vendor seeks to convey, or that the other terms of the contract surrounding the transfer of property are not fulfilled properly. Lawyers have traditionally addressed these risks by means of "due diligence" searches and the production of a "title opinion" letter. It is fair to say that for the most part, the lawyer understands the limitations inherent in such a letter, while the average client misinterprets the "title opinion" to be a guarantee that they will never have a problem with their title, or any other aspect of their transaction. While that dichotomy in the points of view of lawyer and client has resulted in much grief and litigation, the essential point is that the title opinion format is one way of addressing the risks inherent in the purchase of a home. Whether or not they are aware of it, the client is attempting to reduce his or her risks by retaining a lawyer. The lawyer's function is to identify the risks, avoid them where possible, minimize them where they are unavoidable, and to inform and advise the client about the risks that they are assuming. In a perfect world, the client then completes such a transaction understanding the limitations inherent in the title opinion format, satisfied with the manner in which the specific risks have been addressed, and informed about the risks they are assuming.

The difficulties and limitations with this format are well known, and include:

• The lack of understanding about the limitations of a "title opinion," especially that it is based on the information that is available at the time of enquiry, and that it is subject to the availability and accuracy of that information.
• The ever-changing and expanding scope of the searches required by the lawyer in order to meet the appropriate standard of professional care in preparing the "title opinion".
• The ever-increasing cost of the searches made to develop the "title opinion" and the resistance of clients to pay those costs.
• The difficulty in obtaining timely and accurate responses to the search enquiries made.
• The reality that the professional insurance that backs up the title opinion might not be available, notably in circumstances where the lawyer has retired, died, or has been disbarred, or where the terms of the policy have otherwise been voided.

The re-allocation of risk using title insurance:

With the introduction of title insurance, lawyers and clients have another way to address the risks inherent in every real estate transaction. Through title insurance the risks are "re-allocated," and at the conclusion of the transaction the client has:

• Addressed risks that are never part of the "title opinion" format (for example: coverage against fraud on the public record),
• Obtained a direct means to obtain indemnification for loss suffered where title and related information was not available, incomplete, or in error,
• Moved away from a negligence based loss recovery path, to an insurance based loss recovery path, and
• Where specific title issues are raised in the course of the transaction, the client through their lawyer has the ability to negotiate specific coverage to shift that risk to the insurer. Previously their only choices were to either assume that risk themselves or, (depending on the seriousness of the defect and the terms of the agreement of purchase and sale) to seek to terminate the transaction.

In summary therefore, it is useful to view the path to completion of a real estate transaction as a means of discovering and assessing the risks and then determining where those risks are to reside. By using title insurance, many risks that previously resided with the client can now be shifted to the title insurer.

Put another way, if a lawyer provides a client with a solicitor's opinion of title and that opinion is founded on enquiries, decisions and advice that meet the standard of professional care required in the conduct of that file, the lawyer is able to prove the standard has been met, the courts accept the lawyer's evidence, and LAWPRO examiners are unyielding, there will be no possibility of a successful claim by that client under the LAWPRO professional liability policy. The client could still suffer a loss, but that loss would be shouldered by the client since there had been no negligence on the part of the lawyer. Using title insurance, the client is in a better position because many of the non-negligence risks of loss are covered. If the TitlePLUS format of insurance is obtained, the client also has the additional assurance that there will be no issue of definition between what is a "title insured" matter, and what is a "legal services" coverage issue.

1.2 The case for title insuring every purchase

If title insurance has advantages over the title assurance provided by a solicitor's opinion on title, does it follow that every purchase should be title insured unless the client instructs otherwise? Consider the following outline of the costs and the benefits of such an approach:

1.2.1 Summary of Enhancements to the Protection afforded by Title Insurance:
The benefits to the client of obtaining title insurance as opposed to obtaining the traditional "title opinion" are numerous, but can be characterized as follows:

• The extent of coverage: The list of risks addressed using title insurance is at least as broad as that afforded by the title opinion format.
• Additional coverage items: Indemnity for loss resulting from after-purchase fraud on the public record, and after-purchase protection from a neighbouring building being constructed on the property is only available through title insurance.
• The "endurance of the coverage": Coverage by the lawyer/LAWPRO depends upon the time for which the LAWPRO policy is maintained in force, and the lawyer lives (and has assets with which to satisfy a judgment). This time-period is irrelevant to a purchaser. Title insurance provides an owner with coverage for the actual time that they will need that benefit, namely their period of ownership, (as extended by the time in which they have a continuing liability under an implied covenant as a vendor¹, or legal interest as VTB mortgagee). Furthermore, title insurance policies contain clear "continuation of coverage" provisions to the spouse, child, and heirs of the owner, and a trustee or successor trustee where the owner is the settlor.
• The "avenue of recovery": An insured has a clear and broad pathway to recovery of losses under the claims procedure contained within a title insurance policy. The claims route under a title insurance policy is based on an insurance contract for indemnity following the claims procedure contained in the policy, while a person claiming against a lawyer/LAWPRO will only be successful if they can prove that their loss is based on the limited grounds of solicitor's negligence, breach of fiduciary duty, or breach of the retainer. Because the claims route and the circumstances under which an insured is entitled to claim under the policy is clearly defined (in most cases) the expectation is that claims resolution should be quicker, less expensive and generally more efficient than claims made under the negligence-based system.

1.2.2 Cost of Title Insurance Coverage:
Having determined that there is enhanced protection afforded to the client in closing the purchase using title insurance instead of obtaining a solicitor's title opinion, the question then is what is the cost of those enhancements, and is that cost viewed by the client as providing value to the client. For these purposes, it is the net cost that title insurance will have on the purchase disbursements that should be considered.

Title insurers permit policies to issue with some reductions in the "due diligence" searches that a solicitor practicing to an appropriate standard would be required to conduct (with their attendant costs) if the solicitor was providing a solicitor's opinion on title. Many of these searches are undertaken for the purpose of addressing risks that if realized would give rise to a financial consequence, rather than a catastrophic failure of title, and so from a cost/benefit perspective are more appropriately handled by insurance. It is unlikely that a client would wish to have these searches performed if insurance was available for losses attributable to them. These would include:

• Execution searches behind the present registered owner;
• Corporate status enquiries for companies in the chain of title;
• Subdivision and Development agreements; and/or
• PPSA lien searches where TitlePLUS coverage is used.

In addition, and depending on the needs of the client and the requirements of the insurer, there are other searches or enquiries that a client may elect not to perform and an insurer may not require in order to provide full coverage under the title insurance policy. These include the following:

• An up to date survey/real property report;
• Zoning reports; and/or
• Work order reports.

[The availability of reports from these searches and enquiries within the short time-frame available for most real estate closings may present a practical problem in obtaining these searches.]

Lastly, use of title insurance permits the transaction to be completed without payment of the LSUC transaction levy.²

For purchases having a purchase price of $500,000 or less, it is not uncommon for the disbursements cost savings using the title insurance format to exceed the policy premium. Where it does not, (which is more frequent as the premium rises on more expensive properties), the net cost of the policy is still relatively low.

1.2.3 Shifting the Bias: Title Insurance Coverage as the Preferred Basis for Completion of a Real Estate Purchase: In view of the fact that the client clearly has more risks addressed by a "title insurance" policy than by obtaining a "solicitor's opinion of title," it is my view that there should be a bias toward using title insurance on each purchase transaction.
If a client instructs you to complete the transaction on the basis that a title insurance policy is not to be obtained, the client should have all of the facts clearly before them, and should instruct you in writing that they understand the advantages of using title insurance, but have instructed you to complete without obtaining a title insurance policy.

1.2.4 Limitations on the Use of Title Insurance:
The issuance of a title insurance policy may be the preferred basis for completing a residential real estate purchase, but there are times when the use of title insurance does not adequately address the needs of the client. While Canadians move on average every few years, homes are generally not treated as a commodity, and have a special place in the hearts of most owners. For this reason, when a problem is discovered (even if it is one for which title insurance is available to assist in the closing of the transaction) a client will need to consider whether he or she would be satisfied with financial indemnity for the loss, or whether the loss would so alter the special nature of the asset that the client should instead use any rights available to them to terminate the transaction.

Consider the example of a purchase where in the course of enquiries it is discovered that there is a significant encroachment onto an unopened road allowance of a garage with a second storey artist's studio. The possibility exists that the municipality might open the roadway and require removal of all or part of the offending structure. An insurer might offer "forced removal" coverage for the client, thereby providing financial indemnity if the municipality requires all or part of the structure to be removed. A serious discussion will have to take place in which the client assesses the likelihood of the removal being required, envisions the property with the offending structure removed, and considers whether or not they would be satisfied with financial indemnity instead of the home as it presently exists. It is easy to see that one client who desires to purchase the home largely because he or she envisions years of enjoyment in the studio might regard the possibility of removal as unsettling, and will not see financial indemnity as a satisfactory substitute for the removal of the studio. Another client who regards the studio as a room of little value to them, (perhaps only intending to use it for storage) might be quite satisfied to accept the risk of removal and may view the prospect of financial indemnity as a satisfactory solution should removal be required.

2. Structure and Coverage of the Typical Title Insurance Policy

(iv) Legal Services: Under the TitlePLUS policy, there is coverage for the legal services provided by the lawyer who provided services to the insured in the transaction if he or she "commits an error or omission providing legal services for the TRANSACTION for which liability is imposed by law." This wording is from the "catch-all" provision contained in the definition of TitlePLUS legal services contract. There are other points in the definition dealing with a failure of legal services in the context of registration, title marketability, and adjustments but put simply, recovery under this section of this policy is founded on the negligent delivery of the legal services performed in completing the transaction. The protection for the purchaser relating to chattels that are found to have an encumbrance is found in this section. In Ontario there is an expectation that each legal service is insured. Every lawyer is personally and fully liable without limit for the liability of providing legal services that fall below the acceptable professional standard. That personal liability is supported by mandatory professional insurance through LAWPRO with a minimum of $1,000,000 coverage. Additional coverage is carried by many lawyers through LAWPRO or other excess insurance carriers. Because of the special relationship of LAWPRO and TitlePLUS, coverage for both the traditional title insurance and the legal services in completing the transaction are seamless in the Tit1ePLUS policy. For clients obtaining a traditional title insurance policy from another insurer, coverage for title matters is under that title policy, and coverage for legal services is provided by the lawyer personally with that coverage "backstopped" by LAWPRO. The combining of legal services and title coverage in the Tit1ePLUS policy needs special examination.

Advantages for the Client of the Legal Services Coverage under the TitlePLUS Policy:

• The greatest benefit for a client in having the legal services coverage combined in the title insurance policy is that the client cannot be caught between two insurers who disagree on whether the claim is one that should be recovered under the title insurance policy (because the claim falls within the title insurance contract), or the negligence-based professional liability route addressed by the LAWPRO policy (because the claim is based on a failure of the professional advice or services provided). Ultimately, the position of the client may be the same whether they recover from the title insurer or LAWPRO. The benefit is in avoidance of a potential conflict over who is to pay.
• Availability of recovery against the lawyer (and the LAWPRO E&O policy) has its own limits that are not readily apparent to a client, and include:
  1. the LAWPRO policy that "backstops" the lawyer's liability has a limited lifespan and may not be in force at the date on which the claim is made due to the death, retirement or disbarment of the lawyer. Coverage under the TitlePLUS policy is available for the life of the policy, which has the potential to exceed the life of the LAWPRO policy or the availability of recovery against the lawyer personally;
  2. if the lawyer has retired and has run-off coverage, the policy limits on that coverage will in the usual course be reduced, usually to $250,000;
  3. the LAWPRO policy may not be available if the lawyer has by his or her actions voided the policy;
  4. the net worth of the lawyer (where the E&O policy is not available or exceeded) may be of questionable worth.

Limitations for the Client of the Legal Services Coverage under the TitlePLUS Policy:

• The amount of recovery is tied to the financial limits in the policy, that is to say the ACTUAL LOSS sustained to a maximum of the value of the property insured (the LAND, in TitlePLUS terms) as increased with the inflation protection under a purchaser's policy (up to double the purchase price).

However, presumably where financial loss is claimed by a client that is likely to exceed the TitlePLUS policy limits, and the loss is attributable to the negligence of the solicitor who acted on the transaction, the client would claim under the Tit1ePLUS policy, and would also put the lawyer on notice of a claim against the lawyer personally for the excess of the claim over the TitlePLUS policy limits. In that case, the general E&O policy would respond to the claim as well.

Additional considerations related to the TitlePLUS policy:

Relationship with the LSUC: Tit1ePLUS is part of LAWPRO which is owned by the Law Society of Upper Canada of which we are all members. Hence, in recommending TitlePLUS a lawyer needs to make this relationship clear. You will note that this is contained within the Tit1ePLUS Acknowledgment and Direction document that the client signs prior to closing and the issuance of the policy.

Advantage to the lawyer: To my knowledge all title insurers provide a limited waiver of subrogation to the lawyer who provides the opinion upon which the title insurance policy is issued. [It should be noted that this waiver of subrogation does not provide insurance to either the lawyer or the client for the legal services component of the transaction, but is instead a waiver of the right of the insurer to seek indemnity from the lawyer for claims paid that fall within the scope of the "title" coverage provided by the policy.] If a client obtains a title insurance policy from an insurer other than TitlePLUS and

• the insurer does not respond to the claim,
• the insurer disputes that the claim is one that falls within the specific items of coverage contained within that policy, or
• if the claim is founded on the negligence of the lawyer in providing advice or other legal services,

Our function is of course to serve our clients and not ourselves. It is imperative that the decision involving the selection of a title insurer is justified on the basis of the coverage that is available to the client under the circumstances, and not on the inherent advantage to the lawyer of this aspect of the TitlePLUS policy. It is to be expected that our clients will turn to us for guidance as to which policy best suits their needs in completing their transaction. This is a reality from which we cannot escape. Our guidance must be founded upon our own assessment of the importance that should be attributed to the differences in the coverage available from each of the title insurers, and how those differences apply to the client's unique situation. It follows therefore that we must have a good working knowledge of the differences between the standard policies offered by the various companies, and in the face of unusual facts or title problems we must be prepared to address additional coverage requirements with different insurers and assess the differences in the coverage offered. Different lawyers will of course give different weight to these variations in coverage (and so given the same fact situation it is reasonable to expect a divergence of opinion over which company's coverage is to be preferred). We cannot however, escape this process of assessment, especially when dealing with difficult situations where special underwriting is required. Specifically addressing the "legal services" coverage provided by the TitlePLUS policy, it is the writer's view that the prospect of an improved situation for the lawyer (should there be a claim where the lawyer's negligence is alleged) is of no benefit to the client and so deserves no weighting in the process. On the other hand, a lawyer would properly give weight to the benefit to the client of TitlePLUS' seamless coverage of both title and legal services since it eliminates the likelihood of issues developing between competing insurers over which policy should respond in the event of a claim made by the client.

¹ See implied covenants contained in Land Registration Reform Act, R.S.O 1990 Chap. L4, s.5.
² The waiver of the transaction levy is detailed in the LAWPRO Policy 2003-00 1, Endorsement No. 2, heading "C. Exclusions", item (v.).

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