Private Title Insurance
Executive Summary
A. Introduction
In May of 2002, the Minister of Justice and Attorney General of Manitoba asked the Manitoba Law Reform Commission to review and make recommendations on the issue of private title insurers. The Minister identified six issues of concern, which included areas of potential risk to buyers, to the land titles system and to the survey infrastructure of the province.
The Manitoba Law Reform Commission collaborated with the Law Reform Commission of Saskatchewan on the review, and this report is a joint report of the Commissions.
This report considers the effects of title insurance in the context of residential real property conveyancing. The Commissions were concerned with the maintenance of public confidence in the real property system, particularly with respect to consumer protection and the protection of public infrastructure. The Commissions have made recommendations to protect the interests of purchasers and to protect the public land registration system, while ensuring as much freedom of choice as is compatible with those goals.
B. General Overview
The real property system in western Canada includes three components that form the foundation for security of title and quiet possession of land: the land titles system, the survey fabric and the land use management system.
The Land Titles System
All privately-owned land in Saskatchewan and most privately-owned land in Manitoba is registered in a Torrens land titles system. The mandate of the land titles system is to simplify and facilitate land transactions while providing certainty of title. The system’s main attributes are a government-administered register, a guarantee of registered fee simple interests and a compensation scheme to provide compensation for certain losses. Land titles systems have been implemented in most Canadian jurisdictions; in some cases the older deed registry system will be replaced on a gradual basis as land is transferred.
Under a deed registry system, a buyer must search the chain of title back to the original grant from the Crown to ascertain the seller’s interest in the land. Under the land titles system, this requirement is eliminated. Instead, title is surrendered to the Crown upon every transfer of land. The government then conveys the legal interest to the buyer and guarantees the title. The registered owner of the land has an indefeasible title, guaranteed by the state and, at least in theory, secure against all prior interests or claims and subject only to other prior registered interests. An owner of an interest in land who is deprived of that interest through the operation of the system or official error is entitled to an indemnity for the loss.
While the land titles system provides increased certainty, it has some substantive and procedural weaknesses. There are exceptions to the principle of indefeasible title: the register may be corrected in case of misdescription, error or fraud, and in cases where two certificates of title exist for the same parcel of land, the certificate issued first prevails. While these exceptions introduce some insecurity, compensation may be available to an owner who is deprived of his or her registered interest. A further exception relates to overriding unregistered interests, such as certain easements and rights-of-way. A buyer may be bound by these unregistered interests, and compensation is not available for any associated loss.
Fraudulent land transactions, while still rare, are said to be increasing and are of serious concern. The fraud may take various forms, including title fraud, mortgage fraud and fraud committed by lawyers carrying out real estate conveyancing. The rights of fraud victims, the compensation available to them and the process to be followed to obtain compensation varies under the provincial statutes.
The registration gap is a point of weakness in the land titles system and presents a selling point for title insurance. The gap is the period between the closing of a real property transaction and the establishment of priority by registration in the register; the longer the gap, the greater the risk for parties seeking to register new interests. In Manitoba and Saskatchewan, the preference given to builders’ liens also creates an obstacle. A builder’s lien will take priority over a mortgage if the lien is recorded after the mortgage registration but before proceeds are advanced. These factors cause a delay in the release of sale and mortgage proceeds until registration is complete.
The Survey Fabric
The survey infrastructure, or ‘fabric’, is the system by which land is divided into parcels. The fabric is based on original Dominion Government surveys, further subdivided by plans of roads and subdivisions. The survey fabric provides the geographic underpinning of the land title registration system; an accurate, well-defined and properly maintained survey fabric is required to support efficient real estate transactions, land use planning and enforcement, geographic information and mapping, construction and flood control measures. Further, the effectiveness of the guarantee of title is questionable if the boundaries of the described land cannot be ascertained.
There has been a deterioration in the survey fabric in Manitoba and Saskatchewan. As well, lenders no longer require as a matter of practice that buyers obtain building location certificates or real property reports to assure the security of mortgage loans. As a result, it has become increasingly less likely that existing survey defects will be identified and corrected.
Land Use Management
Municipalities attempt to balance the rights of individual property owners and the interests of the community in orderly and planned development, public safety and economic development through zoning and planning by-laws. In a real property transaction, the buyer assumes the consequences of any non-compliance with zoning and planning requirements that is not remedied before closing. In traditional conveyancing practice, the buyer’s lawyer inquires with the municipal authority to identify non-compliance. This practice, which was the primary means of bringing compliance issues to light, also appears to be decreasing. This may have consequences both for private interests, with respect to the cost of bringing property into compliance and the loss in value, use and enjoyment of land, and for the public interest, as the integrity of the land management system deteriorates over time.
C. Title Insurance
A title insurance policy in respect of real property is a contract under which the insurer agrees to indemnify the insured for certain losses relating to an interest in land. Generally, the policy insures against loss caused by a defect in title, the existence of a lien or encumbrance, a defect in a document that evidences a security interest or deed of trust, or any other matter defined in the policy that affects the title or the right to use and enjoy the property. Insurance is available for residential and commercial property, and for owners and lenders in purchase and refinance transactions. It may include coverage for problems that existed at the date the policy was issued but were undiscovered, as well as for future risks related to fraud, forgery and encroachment.
Critics of title insurance argue that it is of limited value in a land titles system, as it duplicates the compensation provided through the system. This is compounded when both the owner and lender have title insurance and the loss is covered by the statutory compensation scheme. On the other hand, proponents assert that title insurance may complement the land titles compensation scheme; for example, in covering losses resulting from overriding unregistered interests. Compensation under title insurance is also said to be more convenient to obtain and to be paid more quickly. Title insurance facilitates the release of mortgage and sale proceeds on closing, and may insure off-title matters, such as survey defects and zoning non-compliance, that the land titles system does not cover. While critics of title insurance prefer traditional conveyancing practice as a means of discovering and addressing these off-title matters, proponents of title insurance argue that insurance is a less expensive option.
Title insurers are subject to the regulatory provisions that apply to other insurance companies, with respect to incorporation, capitalization and reporting requirements. Recent amendments to The Consumer Protection Act in Manitoba and the Cost of Credit Disclosure Act, 2002 in Saskatchewan impose stringent requirements on lenders with respect to the disclosure of borrowing costs, and permit borrowers to purchase mandatory insurance from insurers of their choice and to cancel optional services, such as insurance. The amendments specifically refer to title insurance. Manitoba insurance legislation has additional provisions prohibiting unfair or deceptive practices, and in both Manitoba and Saskatchewan an insurer may be prohibited from using a policy, application or endorsement that is unfair, fraudulent or not in the public interest.
The Ontario legal profession offers a title insurance product through the errors and omissions insurer of the Law Society of Upper Canada. The insurance aims to retain some of the consumer protection aspects of traditional conveyancing practice, by incorporating certain conveyancing requirements into underwriting practice and terms of coverage. In western Canada, greater resistance by lawyers to title insurance continues. In 2001, the western law societies developed the Western Law Societies Conveyancing Protocol, which sets practice standards intended to provide similar benefits to title insurance. Under the Protocol, a lawyer may release the solicitor’s opinion on title immediately upon closing, facilitating the release of mortgage proceeds. Any loss suffered by a buyer or lender as a result of an intervening registration will be indemnified by the professional liability claims fund. A lender who waives the requirement for a current survey will also be indemnified from the fund. However, most major financial institutions continue to prefer the more extensive protection offered by title insurance.
D. Protection of Public Systems
The initial question considered by the Commissions was whether a ban on the sale of title insurance is justified. It is possible to foresee a negative impact on the land titles system when defects in title or land use are insured over rather than corrected. However, in the Commissions’ opinion, a ban would be a disproportionate response to the possible harm, and would not address the underlying weaknesses of the real property system to which title insurance has been a response. Instead, other measures should be considered that may reduce any possible harm to the public interest while preserving access to a product that benefits some consumers.
Implementation of the 1990 and 1993 recommendations of the Joint Land Titles Committee would improve the integrity and reliability of the land titles system and close many of the gaps in protection. To help to ensure that certificates of title accurately reflect the current state of the title, the Commissions also recommend legislative amendments to require that interest holders discharge registered interests within 30 days after the interests cease to exist. The amendments should also provide for a fine for a failure to comply and for liability for losses that result from non-compliance.
Amendments to confer priority on registered interests according to their initial entry rather than completion of registration, and the reform of registry procedures to ensure that applications are entered upon receipt or at least in the order in which they are received, would address some of the problems caused by the registration gap. Further, the registration gap is in principle a malfunction of the registration system, and extending compensation to losses resulting from the gap would render both title insurance and the Western Law Societies Conveyancing Protocol less necessary. The Commissions recommend that both Manitoba and Saskatchewan amend their legislation to extend compensation for these losses, and that Manitoba provide for ongoing funding of the assurance fund.
The Commissions are not prepared within the scope of this report to recommend a government-administered insurance scheme to replace the existing compensation system, or to recommend a substantial expansion of the scope of the indemnity. The Commissions do recommend modest extensions, to provide expressly for immediate indefeasibility for fee simple interests for innocent purchasers, and to permit payment of compensation for error even when the claimant is partially responsible for the loss.
The Commissions considered mechanisms to reduce the incidence of fraud, and are not persuaded that measures to restrict public access to the land titles system are justified. In Saskatchewan, a program to notify owners of the registration of mortgage instruments is useful and should be implemented in Manitoba. Manitoba’s legislation should also be amended to provide that the assurance fund is a fund of first resort, which would reflect the current practice of the Registrar.
Survey defects and non-compliance with planning and zoning requirements affect not only the property owner, but also his or her neighbours and the broader community. Nevertheless, the Commissions do not consider it appropriate to place additional requirements on residential purchasers. Rather, a more proactive approach by the provinces to the protection of the survey fabric is required.
The Commissions considered whether the land titles registry should be expanded to incorporate survey and zoning registers in order to create a better mirror of the title. A more comprehensive register would be significant improvement to the land titles, survey and land management infrastructure. The Commissions recommend that both Manitoba and Saskatchewan consider creating an integrated land records database to provide a broad and comprehensive range of information about land.
E. Consumer Protection
Critics allege that title insurance, associated transaction management services and the bundling of services compromise consumer protection by threatening access to independent legal advice in real property transactions and making it difficult for consumers to make informed choices. Pressures may also be placed on the lawyer-client relationship by the inclusion of indirect benefits for the lawyer in a title insurance policy, including the insurer’s waiver of the right of subrogation.
In the Commissions’ view, additional rules of professional conduct regarding a lawyer’s professional obligations with respect to title insurance would help to protect the interests of consumers considering the purchase of title insurance. The Commissions are not persuaded that lawyers should be prohibited from applying for title insurance on behalf of their clients, and recommend that the relevant legislation clearly provide that lawyers are permitted to do so. As well, consumer protection legislation should be amended to require those that offer title insurance to borrowers to disclose specific information about the insurance, fees, other methods of assuring title and any benefits to the lender or person promoting the insurance in return for offering the insurance to the borrower. The appropriate insurance legislation should also be amended to require title insurers to include protection against losses suffered as a result of document preparation errors by third party service providers.
To the extent that transaction management service providers may engage in the unauthorized practice of law, the Law Societies of Saskatchewan and Manitoba currently have the power to investigate and prosecute such activities, and the Commissions are of the view that no further legislation is required.
The Commissions considered the obligations imposed on sellers of residential property in some other countries to provide potential purchasers with extensive disclosure about the property, and this concept may have merit. While it is beyond the scope of this report to examine the issue in detail, further study should be undertaken.
The Commissions note that the payment of referral fees from insurers to lenders and lawyers is already prohibited by legislation and professional codes of conduct. Under the recent amendments to consumer credit legislation in Manitoba and Saskatchewan, the disclosure of fees and premiums charged is also required. In the Commissions’ view, additional regulation of title insurance premiums is not necessary to protect consumers.
Report #114,
April, 2007
|
