The Gazette 1993

JAN/FEB 1993 '

GAZETTE

lessees, optionees and mortgagees. A standard owner's policy insures against: a) title to the estate or interest described being vested other than as stated; b) any defect in or lien or incumbrance on the title not otherwise excepted from coverage; c) lack of legal access to and from the property; and d) legal (as opposed to economic) unmarketability of the title. A lender's (or so-called "loan") policy additionally insures the validity, enforceability and priority of the lender's mortgage. The title insurance policy obligates the title insurer, subject to the policy terms, to pay for the defence of all claims, with or without merit, which purport to defeat the insured interest. Title insurers also offer so called "extended coverage" policies for a higher premium which can provide wider protection against loss should the circumstances so require. c) Title insurers' assumption of risk. If, as might appear at first glance, a title company can effectively reduce its exposure to claims by carefully and competently examining the relevant title records and refusing to cover any adverse matter which is discovered, what is the benefit of a title insurance policy to a property owner or a mortgagee? 15 The answer partly lies in the fact that a title insurer will assume some risk. The title policy insures against loss arising from certain kinds of "off-record" risks or "hidden defects" which cannot be discovered by a thorough and accurate search of the title records such as, for example, the forgery of a document in the chain of title, the non-delivery of a conveyance or the misfiling or incorrect indexing by the Recorder. A title insurance company may also be willing to "insure around" (i.e. delete as an exception to coverage) a known title defect under certain conditions. This might occur if, for example, the risk of a claim is deemed to be extremely remote or a satisfactory indemnity is obtained from an appropriate party indemnifying the title insurer for any losses it may suffer for insuring around the known defect.

to the method used in title registration). Most Recorders' offices, on the other hand, use alphabetical name indices which require an examination of a grantor- grantee index, among others, to determine what instruments affect the title to a given piece of property. The trace index affords a more convenient and rapid examination of title documents and this method is generally regarded as being far superior to that of the Recorders' offices. 14 On completion of the title search a non-binding "preliminary report" is delivered to the proposed insured prior to the conclusion of the real property transaction. The preliminary report includes a list of matters purporting to affect title which the title insurer declines to provide coverage against loss if and when a policy is issued. Matters listed are said to be "excepted" from coverage. The preliminary report differs from an abstract of title because it does not presume to list every matter of record relating to the subject property. A title insurer is potentially liable under a title insurance policy for losses suffered by reason of any matter affecting title not specifically excepted from coverage (or otherwise excluded pursuant to standard exclusionary provisions). An abstract preparer, on the other hand, is potentially liable for losses suffered by reason of any matter affecting title not specifically included in the abstract. Title insurance policies are issued upon payment of a one-time premium and are effective for as long as the insured has an interest in the subject property. The premium for an owner's policy is normally based on the value of the property (i.e., the purchase price in the case of a sale), or the loan amount where the policy insures the priority of the lender's mortgage, and is calculated at a fixed amount for each $1,000 insured. Most states regulate to a greater or lesser extent the rates that title insurance companies can charge. Title insurance is available to freehold owners as well as to those holding other interests, such as

As a practical matter, the preliminary report serves to identify problem areas and risks which can often be eliminated prior to the completion of a transaction and, thus, not assumed by the proposed insured. What can be deleted as an exception to coverage is subject to negotiation with the title company. Coverage issues are handled by underwriters, sometimes aided by in-house lawyers, who make the final decisions affecting risk and potential liability. Of course, the title company may be unwilling to assume the risk of deleting an exception to coverage which appears in the preliminary report and, if the proposed insured cannot independently resolve the matter with the seller or holder of the adverse interest, the transaction may fail (and no title insurance is purchased). Title insurance companies in the United States are very much involved in assisting purchasers and lenders in dealing with title matters and routinely suggest ways of deleting exceptions to coverage. In this regard title companies have been called the "sole arbitrators of title questions" 16 and the "supreme court on titles to real property." 17 d) Limitations of title insurance. It is important to remember that title insurance does not guarantee the title of a particular piece of real property and likewise cannot be equated with evidence of title. For instance, a title insurer could choose not to conduct a search of the public records prior to issuing an owner's title policy to a purchaser (in most states there is no legal requirement that a title insurer must do so) and thereby, in effect, assume the risk of failure of title. Should that risk materialise, and litigation to establish good title is ruled out or is unsuccessful, the purchaser would be indemnified for the monetary loss incurred (up to the stated maximum in the policy) but lose the interest mistakenly believed to be his. However, title insurers usually do not take this high-risk approach to their business as undertaking this practice would "remove the basis for curative action, and as titles become more uncertain, losses would increase and insurance rates would go up." 18 27