Commercial title insurance as a ‘safety net’ vs. title insurance as a ‘Band-Aid’
May 13th, 2014 | By Paul Miron
In my last blog, The value of commercial title insurance, I highlighted the key areas of coverage offered by our commercial policies (e.g. title, off-title and transactional). What I stopped short of describing was how the policies also provide legal professionals with the ability to close transactions much more efficiently by reducing the need for certain steps in the closing process. I usually like to explain this benefit to customers by showing how title insurance acts as a ‘safety net’ as opposed to how many people view it as more of a ‘Band-Aid’.
As a Band-Aid
I sometimes get comments that title insurance is just a ‘Band-Aid’ solution to a title defect. It doesn’t fix the problem, but rather, just bounces the issue down the road for another day. Some of these are issues that only lawyers would understand and care about, such as old leases where the tenant is no longer in possession; old mortgages that have been paid out but not discharged; old construction liens; a dower rights issue; minor encroachments etc. When used in this way, title insurance can insure over these matters and allow the deal to close on time while protecting the insured. The purchaser can always decide whether or not it wants to spend the time and money to have these matters cleaned up after closing.
But what about unknown defects that are also covered on closing? One analogy is title insurance as a protective ‘safety net’.
As a safety net
If you think of the closing process as the journey a hiker would take to get from one mountain top to the next. That hiker has two potential options:
Option 1) The valley
You could travel from the top of the mountain down to the valley and back up the next mountain ridge. Taking this path is time consuming as it includes many steps/obstacles, such as crossing streams or going around cliffs and it could present many risks that you need to react to. In comparison to a real estate closing, these steps could include getting a survey; confirming agreement compliance; and confirmation of the non-existence of work orders. The risks you find could be an encroachment or zoning issue, or that a work order is outstanding. We can provide coverage over some of these known issues as per the Band-Aid analogy; however did you know there is another option? An option of using title insurance proactively vs reactively to cover a known issue….
Option 2) The foot bridge
You can also take the foot bridge from peak-to-peak. This is the quickest way to get from point A to point B, avoiding some of the steps/obstacles and risks in the valley. But as a prudent lawyer you would never take a shortcut knowing the potential risk associated with this path. Is the bridge safe all the way to the other side or rickety somewhere along the way? What if a sudden storm arises when the hiker is at the middle of the bridge? Traditionally you would never take this path, but with title insurance as your ‘safety net’ you can, and many commercial lawyers do.
When you decide to get title insurance earlier in the deal, it gives you this option to take the quickest path making for the most efficient closing process. You avoid the time, money and effort associated with conducting many searches, while providing coverage for known and unknown issues that could come up later. And the best part is that this safety net will be there for the next transaction as well.
So ask yourself: will you choose to make the trek through the valley or will you rely on the safety net? The journey is yours.
Subject to certain exceptions, commercial title insurance policies equal or below $10M CAD are provided by FCT Insurance Company Ltd. Commercial title insurance policies above $10M CAD are provided by First American Title Insurance Company. Reference should be made to policy documents to confirm the insurer on any individual transaction. Services by First Canadian Title Company Limited. The services company does not provide insurance products. This material is intended to provide general information only. For specific coverage and exclusions, refer to the applicable policy. Copies are available upon request. Some products/services may vary by province. Prices and products/services offered are subject to change without notice.
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