Title Insurance - What is it and do I need it?

Recently some clients have been asking about title insurance and the question begs, is it necessary and is it worth pursuing.  We conducted research amongst our clients who recently purchased property and it appears that some Conveyancers have been recommending it, whilst others ignore it and don't think it's worth it.  So what is title insurance and is it worth it?

There are many types of insurance products on the market.  Title insurance has its own place and should not be confused with other property related insurance products such as:

• Home building insurance
• Contents insurance
• Landlords insurance
• Lenders mortgage insurance (taken out by a bank/lender)

What is Title Insurance?

Put simply, a Title Insurance policy is a no-fault contract of indemnity based upon an agreed representation of the state of title to a particular  property as at the policy date (being the date of settlement).

The four common  types of Title Insurance policy are for:

• Home owners
• Commercial property owners
• Residential mortgage lenders
• Commercial mortgage lenders.

During a conveyancing transaction a Solicitor or Conveyancer  will work diligently to identify risks that may affect property. They will  often find matters that could affect use of the property in the future;  however, there are also risks that the most diligent process cannot discover which may be insured under a Title Insurance policy.

What is Home Owner Title Insurance?

Title Insurance for home owners generally protects purchasers and existing owners of residential property against risks that could cause stress and financial loss in the future. These risks may not always be  discovered before settlement and can be categorised as ‘known’ or ‘unknown’  risks. In effect, a home owner policy insures over the property title due diligence process and if a purchaser suffers a loss, they simply make a claim.

What are ‘known’ and ‘unknown’ risks?

‘Unknown risks’ are risks that are not identified  during the Conveyancing transaction before settlement but that may arise during property ownership and cause financial loss to the owner. ‘Known risks’ are any defects in title that are disclosed by the vendor or otherwise discovered by the purchaser prior to settlement (e.g. Building works completed without council approval).  If there are no known risks evident a policy will be issued for  ‘clean title’.

What does a Title Insurance policy typically provide coverage for?

A typical home owner’s policy protects against risks including:

• Illegal building works / structures
• Mortgage or title fraud after settlement
• Incorrect signature of a document
• Forgery, fraud, duress, incompetency, incapacity or impersonation prior to settlement
• Defective registration of a document
• Lack of rights of access or use of services
• Breach of covenants
• Survey cover for boundary issues
• Encroachment by or on to the insured property
• Lack of zoning certificates
• Title being vested in someone other than the  insured
• Problems with the registration gap

The Title Insurer will also defend any challenge to the insured’s title,  and if ultimately unsuccessful, will indemnify the insured against their loss  if an insured risk occurs.

Who uses Title Insurance?

A growing class of Title Insurance users in Australia and New Zealand  are people purchasing homes, or who already own homes.

As the value of properties have soared, faced with growing risks such  as fraud or forgery, illegal building works and other title defects that are  more likely to have a significant financial impact, Title Insurance offers  numerous benefits.

In addition, Title Insurance provides a solution for identified risks.  Under the traditional conveyancing process, where a defect in title is discovered, a purchaser’s options can be categorised loosely as follows:

• If before exchange of contract, the purchaser can choose not to proceed or try and negotiate a reduction in the purchase price;
• If after exchange, the purchaser may have a right to rescind (in limited circumstances) or to claim compensation.

With Title Insurance, the  purchaser has a further option. For the first time in Australia, a purchaser can take out  insurance cover in respect of a known title defect.

What does Title Insurance do?

Title Insurance is a viable solution to numerous issues that might present themselves in a conveyancing transaction:

• The most important thing Title Insurance does is to  give the Conveyancer a wider range of options in helping clients to find  practical, safe and financially efficient ways of managing their transaction.
• Title Insurance can offer protection in respect of  known risks.
• Title Insurance offers protection over key risks such as illegal building structures – which is particularly important, given a  recent Archicentre Report which suggested more than 25% of homes Australia-wide  have some form of illegal building works.
• It can offer a quick route out of otherwise time consuming (important with fixed fees) problems.
• It offers reassurance to  clients that someone else will meet the costs of defending their title should  problems ever arise and will compensate them if the title cannot be defended, without  the need to prove negligence.

What does Title Insurance not do?

It doesn’t replace a competent Solicitor or Conveyancer. Title Insurance  allows the Practitioner to transfer some of the labour and liability for certain  aspects of title examination, but still requires the Practitioner’s input on a  range of important matters necessary in a conveyance.

Title Insurance cannot deal  with non-title matters such as contamination – and the Solicitor or Conveyancer  needs to look carefully at the policy wording to understand the terms,  conditions and exclusions – which may vary from title insurer to title insurer.

I already own my home, can I still be insured?

Yes, title insurance can be taken out for a property  which is already owned. You’ll receive the same types of protection against fraud and forgery and ownership rights.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.