A Banker Asked Us: What's the difference between title insurance and a title opinion?

29 April 2019

Over the past two decades, title insurance has gained significant traction in Ontario as a means of providing front-end comfort to owners and lenders alike with respect to purchases and financings of real estate. For owners, a title insurance policy is intended to insure the registered owner's interest in the land itself; for lenders, a policy is intended to insure against defects or adverse third party claims that might impair the lender's registered security – typically, a mortgage – supporting a loan made to a borrower. Prior to the broad adoption of title insurance in Ontario, a lender would normally require a satisfactory title opinion from its solicitor, providing an assurance to the lender that its mortgage is "good and valid". This begs some obvious questions: what are the main differences between title insurance and a title opinion, and in what circumstances, if any, should a lender prefer one over the other?

Title Opinions: The old method

With respect to commercial loans, title opinions are meant to affirmatively assure that: (i) an owner/borrower has good title to a property; and (ii) the lender has a good and valid mortgage charging the property. A lawyer must be retained to review the property's title and conduct (and review) extensive searches, both with respect to the title itself and any off-title matters that could impact a lender's security position - for example, whether any outstanding work orders resulting from a violation of building codes have been issued against the property. Following their review, assuming no fatal defects are found, the lawyer will issue a "title opinion" confirming the above-noted assurances.[1]

Unfortunately, title opinions are not foolproof, meaning that issues may slip through the cracks. If, following closing, a loan goes into default and a problem arises with respect to the owner's title or the lender's mortgage when the lender attempts to enforce its security via the mortgage, the lender can turn to the lawyer and request that the problem be remedied. However, unless the problem can be easily addressed, the lender and the lawyer may find themselves in an adversarial position, the end result being that the lender might need to sue their (now former) lawyer in order to prove negligence and seek compensation for any losses arising from the error and/or omission on the part of the lawyer.

Title Insurance: The new alternative

As compared to title opinions, title insurance policies are meant to provide a faster method for lenders to obtain a mortgage over a given property while still retaining a sense of certainty over their security position. However, it is important to note that, unlike a title opinion, which attempts to assure good title and/or security, title insurance is meant to insure against the risks specified in the subject policy. In other words, title insurance only insures covered risks. If, following default, a covered risk rears its head during the life of a loan, the lender can potentially look to the title insurance policy to resolve the issue. Alternatively, the lender can also resort to the insurance policy to seek compensation relating to or arising from the defect or third party claims.[2] In this way, title insurance has two primary components:

  1. an indemnity contract whereby the insured (i.e., the lender) has the right to be indemnified against a covered loss; and
  2. a right to have the insurance company defend the insured if a third party threatens the insured's position.

When a title insurance policy is purchased, far less due diligence is typically required as compared to the due diligence that supports a title opinion, as the title or security is not being assured. However, the cost of a title insurance policy will ultimately turn on the amount of the coverage, as loan policy premiums are calculated based on a flat percentage applied against the coverage amount (which is typically tied to either the property value or the loan amount). This means that for large value loans, title insurance can occasionally be rendered prohibitively expensive and a title opinion will constitute a more cost-effective means of confirming a lender's security.

Title Insurance vs. Title Opinions: the key advantages and disadvantages

There are pros and cons associated with both title opinions and title insurance. Some of the key pros and cons for each are outlined in the table below.

  Advantages Disadvantages
Title Opinion
  • Purpose is to affirmatively assure title or security position(s)
  • Can be cheaper than title insurance when dealing with a large-value loan
  • More likely to identify title defects that can be rectified prior to closing
  • Errors can be made and claims from lenders are only made out if negligence is found on the part of the opining lawyer; also only provides the assurance as at the date of the opinion
  • Can be more expensive than title insurance when dealing with a small-to-medium sized loan
  • If mortgages are being registered against multiple properties (especially if they are in multiple jurisdictions), the cost of reviewing each property and/or retaining counsel in each jurisdiction can be prohibitive
  • Certain title defects, once uncovered, may not be readily rectifiable
Title Insurance
  • Insures against covered risks as specified in a subject insurance policy
  • Can be cheaper than a title opinion when dealing with a small-to-medium sized loan; can also provide a uniform method of dealing with title issues when dealing with a mortgage (or mortgages) being registered in multiple jurisdictions
  • Covers some matters that are usually exceptions to a title opinion, such as forged documents, fraud, errors in the public record and errors of public officials, and certain surveying errors; also covers risks throughout the term of the loan/policy
  • Covers certain known title defects, such as improperly closed roads, misdescriptions, paid-off but still registered mortgages, and expired leases
  • Provides an indemnity against covered risks
  • Confers a duty to defend on the part of the insurer with respect to third party claims
  • Does not assure title or security position(s)
  • Can be more expensive than a title opinion when dealing with a large-value loan, as premiums are tied to a land's value or a stipulated coverage amount
  • Contains its own exceptions - for example, municipal agreements, easements or similar encumbrances affecting title - that must be reviewed in the context of each particular loan transaction
  • Coverage (and, by extension, the amount that an insured can recover, whether with respect to a covered risk or in respect of third party claims) is limited to the coverage amount under the policy; compensation also does not cover increases in value as a result of fluctuations in the market or property improvements

Ultimately, while neither method is perfect in any given circumstance, one is typically more fitting than the other. Whether a lender should opt for title insurance or a more traditional title opinion will depend on the size and nature of the loan, the number of mortgaged properties involved, their respective locations and (more generally) a lender's appetite for investing in the minimization of its risk exposure. This is a conversation that should be had with your counsel at an early stage of all transactions. Gowling WLG's real estate and financial services team has extensive experience in this area and the technical know-how to guide you through the process.

[1] Title opinions will typically include a number of qualifications/exceptions that narrow the scope and application of the opinion - for example, an exception that the lawyer will not opine on the enforceability of a forged document.

[2] Whether a lender can rely on the insurance policy will depend on the terms of coverage, exclusions and any specified endorsements.

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