Title Insurance

Scenario

Sam and Martha, a newlywed couple, recently bought their first home from Peter.  After a few months after the sale, they were sued by Peter’s cousin, Paul, who claimed he owned 1/2 of the rights to the house with Peter and did not authorize the sale.  Peter had told Sam & Martha about Paul’s interest in the property prior to the purchase of the home but assured them that he had authority to sell.

Questions to Answer

1.  Would title insurance cover Sam & Martha against Paul’s claim?  Discuss in detail.

2.  Are there any exclusions that might apply?

Answer

Legally, the term title means that one has the ownership of a property. There are some specific points in the case of Martha related to the ownership of the property that require attention. Peter who sold the property to Sam and Martha had told them of Paul’s interest in the property. He had informed them of the interest prior to the deal; however, assured them that he had the authority to sell the property. Title insurance plays a vital role in residential as well as commercial real estate transactions. It protects against any hidden defects as well as defects not of record. Actually, it protects the buyer against losses that may have occurred but are not a part of the public record. It is also the only insurance that protects the buyers against any unforeseen defects. It is also optional and not mandatory.

A title insurance protection acts as an insurance that the holder’s property will be protected against claims whether valid or invalid and without any cost to him. There are a number of hidden risks that title insurance protects against including errors in public information like incorrect information, judgments, liens, mortgages, invalid deeds, etc. However, there are certain exceptions as well[1]. A buyer when he buys title insurance gets the assurance that the title to the property he is seeking to acquire is just as the seller states it to be. In case a seller claims that he has claimed a full and clear title to the buyer, but later a third party claims to have the rights to the property, the title insurance protects the buyer. However, there are also several things that title insurance does not cover.  It does not provide coverage against known title defects which had been revealed to the owner before he purchased the property. In the current case also Sam and Martha had known of the title defect before they purchased the property. Peter had told them of Paul’s interest but on his assurance, they purchased the property considering that he had the authority to sell the property[2].  There are several other exceptions also that are excluded from coverage. They include boundary line disputes, easements which are not a part of public records, taxes or special assessment that are not in public records, claims of people living in the house already, mineral or water rights, etc.

Of all these things the most important thing is that there is a title defect in the given case and that Sam and Martha have ignored it. Moreover, if they have purchased title insurance then they must not have revealed the information to the insurance company. Had they revealed the information, the matter would have gotten clear even before the deal for the property was finalized and the issue would have gotten over at the point.  However, it did not happen and Paul made a claim against Sam and Martha. At this point, the title insurance would not have provided coverage against a known defect.

 

[1] Who Should Buy Title Insurance and Why? (Lautorite 2010), https://www.lautorite.qc.ca/en/title-insurance-conso.html.

[2] Understanding Title Insurance (FSCO 2008), https://www.fsco.gov.on.ca/en/insurance/brochures/Documents/undstitins.pdf.

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