Commercial Title Insurance: A $150 Million Market

Updated June 20, 2024

Real estate deals are always a leap of faith. They entail a lot of risks not just for the buyers, but also for their lenders. To legally assume these risks, a commercial title insurance is in place. What are commercial title insurance policies and are these needed all the time?

The commercial title insurance market is now worth well over $150 million. What has led to its growth? In this article, we’ll discuss the benefits of commercial title insurance and the laws that support it.

What is commercial title insurance?

Title insurance is a no-fault financial product that compensates lenders or purchasers for title problems or disputes in a real estate transaction. The insurer agrees to indemnify any defects assuming the financial risk of a less-than-perfect title, whether the defect is discovered before or after closing. Bound by the insurer’s duty to defend, title insurance companies pay the insured and then, if feasible, recover from third parties who may be liable.

Title insurers protect buyers and lenders against financial loss from several matters covered by the policy, such as:

These matters may arise before or after the closing, and notably, those not covered by legal opinions.

Types of commercial title insurance

A title insurance can either be:

• an owner’s policy
• a lender’s policy

In commercial real estate transactions, these policies can be in the form of:

• a buyer’s policy
• a mortgage lender’s policy

Here’s a brief video to know more about commercial title insurance:

The best property development lawyers in Canada as ranked by Lexpert can also advise you on when you would need commercial title insurance.

What are the benefits of commercial title insurance?

The greatest advantage of title insurance may be its chameleon-like nature. Coverage can take on different features for different types of deals. On a multi-site transaction, for example, the only role of title insurance may be to avoid a cumbersome escrow on closing.

Below are some of the other benefits, including some caution, when purchasing commercial title insurance policies:

Better alternative to a lawyer’s opinion letters

In some transactions with no commercial title insurance, lawyers representing the sellers may execute opinion letters to vouch for the title and do the "off-title" searches. However, parties to a real estate transaction may prefer a commercial title insurance over opinion letters for several reasons.

Not having to prove a lawyer's negligence is what makes title insurance so attractive to lenders and buyers. While title insurers will defend third party claims against title vigorously and imaginatively, their reputation for making the insured whole is excellent.

From a lender’s perspective, it is important that the title insurance coverage in the loan policy insures the mortgage itself, not the lender. “In other words, the policy runs with the loan and remains in place as long as the loan is outstanding,” said Bruce McKenna of Lang Michener LLP. That’s a major advantage over a lawyer’s opinion to a lender, which is not transferable.

Although title insurance does not insure marketable titles and legal opinion letters do, a full title opinion requires the intervention of a lawyer, which takes time and can be costly. Where the buyer and the seller have their own lawyers, title squabbles and vendor and purchaser motions can make closing dates uncertain. It may also foster an adversarial environment that can threaten or delay a transaction.

Time and cost savings are a given when one relies on title insurance, but what about the coverage? @FCT_Canada outlines some of the benefits to owners and lenders when they rely on a title insurance policy versus a lawyer’s opinion letter #titleinsurancehttps://t.co/NqtTQ2N4li

— RENX (@RENXca) July 18, 2023

Exceptions to an insurance policy

There are exemptions or restrictions to title policies that may vary from policy to policy. In most policies, they won’t insure non-title matters or won’t provide legal advice that does not relate to the subject title. Other matters and risks that may not be covered by a commercial title insurance policy are:

• physical and structural defects of the building
• valid government action or claim against the title
• risks waived by the insured

For matters not covered by commercial title insurance, the assistance of a property development or corporate commercial lawyer may be the party’s best option.

Duty to defend

Most commercial title insurances bring with it the duty to defend on the part of the insurer. This will become convenient whenever litigation is involved to defend the insured’s title.

When covered by the insurance policy, this duty to defend will cover the expenses for:

• lawyer's fees for the retained counsel
• legal fees, starting from when the case is filed until judgment is rendered

Helpful in complex transactions involving real estate

Commercial real estate transactions are more complicated than residential ones. This is because of the process, including due diligence, that is required by one or both parties before the deal is officially closed. In these cases, commercial title insurance helps in making these complex transactions seem easy.

When the deal is complicated or unconventional, title insurance facilitates future dealings and refinancing involving the insured property. “Once you get into the title insurance regime it’s easy to do subsequent transactions involving the same property,” McKenna said.

Title insurance is particularly useful in transactions spanning several provinces and involving multiple properties. From the insurer’s perspective, the underwriter can spread the risk over the full range of properties.

For instance, in the Wendy’s/Tim Horton’s merger in 1990s, 660 of the 1200 sites involved were either freeholds or significant leaseholds. “The standard of due diligence accepted by First Canadian, who underwrote the risk, proved far less costly than full title opinions,” recalled McKenna, who represented Wendy’s.

Assurance when it comes to registration gaps

Apart from the costs saved because parties do away with multiple full title searches, title insurers also provide what is known as “gap insurance” to facilitate closings. As McKenna explained, “If you have a multijurisdictional transaction, everybody can get around one boardroom table and exchange the necessary documents. Then gap insurance covers the delay from closing to registration in the various jurisdictions, making it possible to complete a transaction instantly without cumbersome escrow arrangements.”

Gap insurance can be useful even in single jurisdiction closings. A policy’s gap coverage will allow the lender to ensure the priority and enforceability of its loan as of the closing date, even if final registration would not take place for a few days.

In some provinces where there can be a three-day delay between submission of documents for registration and their actual registration, gap coverage is helpful.

When commercial title insurance is not needed

Whether there’s a need for commercial title insurance or not, there is always an important role for lawyers in commercial real estate deals. For example, while there’s rarely a reason not to buy title insurance on a residential property, commercial title insurance isn’t always appropriate. “Title insurance doesn’t always have advantages and may add expense in single property, straightforward commercial transaction,” McKenna said.

Below are some important aspects in commercial real estate transactions that still need lawyers:

• determining whether commercial title insurance is appropriate
• helping select the appropriate insurer, especially in a very competitive environment
• taking responsibility for the transactional aspects of an acquisition or financing
• explaining the policy and its exclusions, ensuring that the client obtains the correct endorsement

“The lawyer has a fundamental role to ensure that the client takes advantage of title insurance in the most effective way possible,” McKenna said.

What are the laws affecting commercial title insurance?

Insurance companies in Canada fall under the federal Insurance Companies Act, plus the provincial Insurance Acts. These laws regulate the insurance companies’ market conduct and their financial stability or solvency. Whether these companies are life, property, or casualty insurers, these laws must be faithfully complied with.

As for the policy itself, aside from these statutes, the laws on contracts will also apply as to the provisions and conditions of these policies. These laws will affect the policy’s:

• payment of premiums
• coverage and exclusions
• payment of claims
• waiver and prescriptive periods

The value of commercial title insurance

Commercial title insurance provides essential protection in real estate transactions by covering risks like title defects and disputes. Its flexibility and comprehensive coverage make it a valuable tool for buyers and lenders. However, it's important to assess when it’s needed and consult with legal experts to guide you in each transaction.

For more information on commercial title insurance, consult with the Lexpert-ranked best corporate commercial lawyers in Canada.