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					Private Title Insurance:   A Role Within a Torrens System of Real Property Registration




                               STANLEY W. HAMILTON
                      Sauder School of Business, University of British Columbia
                                 stanley.hamilton@sauder.ubc.ca




                                            August 2006
                                                1. INTRODUCTION
                                                Private title insurance is a relatively new feature in the real property
                                                markets in Canada. While the first title insurer operating in Canada
                                                appears to have been licensed in 1914, such insurance did not play a
                                                major role in Canada until 19911. Since 1991, at least five insurers have
                                                entered the market in addition to the TitlePLUS program offered through
                                                LawPRO2, the errors and omissions insurer of the Law Society of Upper
                                                Canada. First Canadian Title, established in Canada in 1991, is the country’s
                                                dominant title insurer, operating in all provinces3.

                                                Private title insurance has been available in the United States since the
                                                late 1800s. The earlier introduction of title insurance in the United States
                                                reflected consumer concerns regarding the inadequate state of public
                                                records relating to real property ownership4. The broader use of title
                                                insurance in the United States was stimulated by the requirement that
                                                title insurance be used as a condition of obtaining long term mortgages,
                                                and the introduction of mortgage backed securities (the bundling and
                                                resale of existing mortgages) by Federal National Mortgage Association
                                                (Fannie Mae) where investors sought the added risk management
                                                offered by title insurance to reduce/eliminate certain risks5. The role of
                                                the Federal National Mortgage Association in the mortgage market in
                                                the USA is critical since the Association plays a dominant, and national,
                                                role in facilitating mortgage lending by creating a secondary market for
                                                the primary mortgages.
1
    An Act to Incorporate the Title Insurance
Company of Canada, S.C. 1914, c.118.
                                                2. EVOLVING MARKETPLACE
2
    LawPro is the errors and omissions          The fact that private title insurance started in Canada much later than in
insurer for the Law Society of Upper            the United States undoubtedly reflects, to some extent, the high quality
Canada.                                         of the real property registration systems in place in Canada. This raises
3
    In 1991 First American Title Insurance      the question as to why title insurance suddenly became an issue in
Company initiated operations in                 Canada in the early 1990s. While Canada has well-managed provincial
Canada.                                         public title registration systems in place, these systems, even when coupled
                                                with the services of a lawyer, do not cover all the risks associated with
4
    See Nelson R. Lipshutz, The Regulatory
                                                real estate conveyance and ownership. These “omissions” will be
Economics of Title Insurance, Westport CT,
                                                addressed later. In the changing marketplace, these omissions have
Praeger Publishers, 1994.
                                                become a matter of increasing concern.
5
    The Federal National Mortgage
Association was created as a                    Several factors need be considered as both the mortgage and real property
congressionally chartered corporation           markets are experiencing change. And these are not the only markets
in 1938 to facilitate the secondary             experiencing change. For example, the roles of the accounting and
mortgage market in the USA by buying            investment management professions are undergoing major changes,
federally insured mortgages (Under              both internal and in relation to their clients.
the Federal Housing Administration)
and reselling them as mortgage                  2.1 Cost Effectiveness
backed securities.                              The search for cost efficiencies in the mortgage and real property markets
                                                has played an important role. The drive for cost efficiency has not been


                                                                –1–
                                         limited to the use of title insurance. The use of full appraisal reports,
                                         once a requirement for mortgage lending, has all but disappeared for
                                         many, if not most, residential mortgage lending activities. Full appraisals
                                         were initially replaced by lower cost “drive-by” valuations and then by
                                         reliance on the values determined by the British Columbia Assessment
                                         Authority. Even these approximate valuations have now been replaced
                                         by some lenders with electronic valuations. Indeed in a number of juris-
                                         dictions the consumer can access these electronic valuation services for a
                                         small fee and obtain estimates of value to assist in their bidding, market-
                                         ing and financing processes6. This change principally occurred because
                                         electronic valuations are a more cost efficient way for lenders to address
                                         this issue.

                                         2.2 Real Estate Brokerage
                                         Similarly real estate brokerage – a critical element in the conveyance
                                         process – has experienced pressure to change: to address the “dual
                                         agency issue,” to reduce fees, to provide greater access to information,
                                         and to unbundle their services. In the not too distant past, having a real
                                         estate agent act on behalf of a residential purchaser was uncommon.
                                         Today this service is readily available in the market. While brokerage
                                         fees were once rigid, some suggest fixed, this is no longer the case. Fees
                                         vary as does the type or level of service provided. Moreover the nature
                                         of the fee structure has changed. Where once a percentage of the sales
                                         price was the only fee arrangement offered, today consumers can select
                                         a percentage, flat fee or a variety of combinations. Easier access to multiple
6
    For example, Landcor provides
                                         listing information (MLS), at one time only available to consumers in the
electronic valuations for the province
                                         office of, and in the presence of, the listing agent, has helped create a
of British Columbia and the Municipal
                                         more informed public. Today, many residential purchasers utilize the
Property Assessment Corporation
                                         web to access listing and sales information, take virtual tours of the
(MPAC) does similar electronic
                                         properties and arrange site visits to physically inspect listed properties.
valuations in Ontario.
                                         In addition, web-based facilities are now used to initiate listings and
                                         make offers on standardized, plain language forms.

                                         2.3 Large Scale Developments
                                         The introduction of large scale residential developments, both single-
                                         detached and condominium projects, has also changed the landscape of
                                         real estate marketing. Pre-sales of the units of such developments, often
                                         available with pre-arranged mortgages, are now a common feature in the
                                         marketplace. Moreover, there appears to be an active secondary market
                                         for these pre-sold units. Many buyers, including many first time buyers,
                                         stand in line to obtain one of the pre-sale units with attached financing.
                                         Whether these buyers seek any independent legal advice on these prop-
                                         erties before entering into the property purchase is unclear, but they
                                         obviously place considerable confidence in the developer and the asso-
                                         ciated pre-arranged lender by making deposits on structures yet to be
                                         built.



                                                         –2–
                                          2.4 Mortgage Market
                                          The mortgage market itself has undergone significant change. In Canada,
                                          the mortgage market is dominated by our largest national and provincial
                                          thrift institutions, institutions that have the infrastructure to place a mul-
                                          titude of (relatively small) residential mortgages. These national banks
                                          and strong consumer-oriented credit unions are intent on establishing
                                          long-term relationships with the mortgage borrowers, relationships
                                          that include not only the mortgage, but the other banking and financial
                                          services offered by the institutions. These institutions: have increased
                                          significantly the transparency of their mortgage lending operations, intro-
                                          duced increasingly plain language documents, and provided consumers
                                          with much greater choice and flexibility in their menu of mortgage
                                          options. These institutions are carefully regulated, both nationally and
                                          provincially. These institutions, the core of residential mortgage lending
                                          in Canada, have a strong interest in creating and maintaining satisfied
                                          customers as a satisfied mortgage borrower is a critical part of their
                                          institution-wide client development activities.

                                          2.5 Secondary Mortgage Market
                                          The introduction of an active secondary market for existing residential
                                          mortgages (mortgage backed securities or “MBS”) has played a major
                                          role in our marketplace7. This secondary market allows the primary
                                          lenders to maintain their desired portfolio balance while continuing to
                                          fund new mortgages for, amongst others, residential mortgage consumers.
7
    Canada Mortgage and Housing
                                          The primary lenders are able to “bundle and sell” their mortgages to
Corporation (CMHC) was created in
                                          third party investors while maintaining the management of the mortgages
1946 to administer the National Housing
                                          and the critical consumer contacts. This secondary mortgage market
Act. In 1986 the mandate of CMHC was
                                          helps the primary lenders continue new lending activities while they
extended to provide leadership in
                                          manage their capital exposure to the mortgage market.
the introduction of mortgage backed
securities in Canada.
                                          Third party MBS investors are buying a portfolio of mortgages and have
                                          little interest in the details of the individual mortgages. The development
                                          of the secondary mortgage market has prompted a search for new risk
                                          management tools that cut across provincial regulatory systems.
                                          Investors who purchase the mortgages in the secondary mortgage market
                                          are not interested in managing details of the mortgages that constitute
                                          their secondary portfolio. These investors want risk management tools
                                          that are cost effective, apply across the country, cover a broad range of
                                          risks and, unlike a solicitor’s opinion, are transferable from one lender to
                                          another. Therefore, these investors are attracted to title insurance. The
                                          primary lenders provide a range of warranties relating to the mortgages
                                          included in the MBS pool. Title insurance, beyond the issue of investor
                                          requirements, is a cost effective way to address other needs of the MBS
                                          investors.

                                          Consumers ultimately pay for the cost of the title insurance just as they
                                          do for the legal fees charged by a solicitor who services title. But con-
                                          sumers participating in the residential market also benefit from these
                                                          –3–
                                              secondary market activities as these activities enable the primary lenders
                                              to remain active in placing new mortgages with consumers by attracting
                                              capital from other sectors of the economy. If the secondary mortgage
                                              market did not exist, our primary mortgage lenders may well become
                                              overexposed to residential mortgages, either in general or in specific sec-
                                              tors. If that happened, they have only two options: reduce new mortgage
                                              lending activities outright, or increase the cost of borrowing to ration a
                                              limited supply of funds.

                                              It should be noted that title insurance is currently primarily focused on
                                              the residential sector of the market. This is the sector of the mortgage
                                              market that offers the most homogeneous lending terms and conditions.
                                              Non-residential mortgages tend to be larger in value and more customized
                                              to reflect the circumstances of the property and investor.

                                              The major point is that the real property and mortgage markets are
                                              changing. The traditional system of conveyance and mortgage lending
                                              served the market well. But circumstances have changed, and title
                                              insurance is but one element in this process of change. Consumers are
                                              demanding lower transaction costs, lower servicing costs, instant funding,
                                              more time efficient services and greater consumer choice. And the process
                                              has not ended. Changes continue in the marketplace, and part of the
                                              changes will potentially include changes to the title insurance programs
                                              currently offered in the market.
8
    See N.V. Siebrasse, Title Insurance and
the Canadian Land Conveyancing System,
                                              3. CHANGE CAUSES DISCOMFORT AND CONCERNS
CMHC File 6626-19, Canada Mortgage
                                              As markets change, questions are invariably raised. Traditional suppli-
and Housing Corporation Research
                                              ers of goods and services, and consumers challenge the need for change
Report for background information.
                                              or the nature of the change. The traditional suppliers are concerned with
9
    See for example, Manitoba Law Reform      their own business activities, but they also have helpful and unique
Commission and Law Reform                     insights into the strengths and weaknesses of the former system. These
Commission of Saskatchewan, op cit,           traditional suppliers can bring a helpful analysis if they remain detached
June 2005.                                    from concerns for their own welfare. Many traditional suppliers
                                              embrace change and adapt to new systems and processes quickly, and
                                              benefit accordingly. Others are slow to adapt, indeed some never adapt.

                                              In the face of the growing use of title insurance, questions have been
                                              raised as to the need for this service, in particular asking what is the net
                                              value added by private title insurance, especially in jurisdictions using
                                              the Torrens System of title registration8. Questions are raised about the
                                              impact of title insurance on consumers’ use of legal services. In addition,
                                              concerns have been expressed about the impact of title insurance on the
                                              integrity of the public title systems.

                                              The legal profession has been front and centre in the debate concerning
                                              the role of title insurance9. This is not surprising. The legal profession
                                              has been central to our real property conveyance systems for many years

                                                             –4–
                                             and their members are able to offer insights and raise thoughtful ques-
                                             tions that others less familiar with the process may not be able to raise.
                                             In this regard, the lawyers have a responsibility to speak and act on
                                             behalf of the protection of the public. At the same time, conveyance and
                                             mortgage activities represent a major source of business for some lawyers
                                             and they are, quite naturally, interested in protecting their traditional
                                             sources of business. The challenge is to separate the concerns for protecting
                                             traditional sources of business and a sincere interest in protecting the
                                             public.

                                             As title insurance became more prominent in Canada, the legal profession
                                             responded in several ways. Initially the legal profession across Canada
                                             expressed resistance to the concept of title insurance. In some jurisdictions,
                                             such as British Columbia, this resistance still prevails10. Ontario has
                                             responded to title insurance by offering its own version of a title insurance
                                             program, TitlePLUS, a program offered through LawPRO, the errors and
                                             omissions insurer of the Law Society of Upper Canada. TitlePLUS claims
                                             to overcome what the Law Society of Upper Canada sees as some short-
                                             comings of the private title insurers in Canada by combining title insurance
                                             with prescribed standards of practice for real estate conveyancing,
                                             including, as a condition of obtaining coverage under TitlePLUS, mandated
                                             use of legal advice11. TitlePLUS is sold across Canada, except for Quebec.

                                             The western provinces have taken a somewhat different approach. In
                                             2001, they developed the Western Law Societies Conveyancing Protocol12.
10
     See for example The Law Society of
                                             The Protocol simplifies the conveyancing process for lenders by eliminating
British Columbia, Notice of Annual General
                                             certain steps that were part of the traditional lawyer’s opinion. The key
Meeting, Friday September 23, 2005,
                                             elements of this process include steps to eliminate the “gap”, the time
in particular Resolutions 2 and 3.
                                             between closing and completion of registration, and the waiver of a current
11
     See Manitoba Law Reform Commission      survey. These simplifications expose the lawyer to some risks when the
and Law Reform Commission of                 lawyer’s opinion is wrong because of the streamlined process. To com-
Saskatchewan, op. cit., pp12-13.             pensate for this risk, the Protocol extends the lawyer’s professional liability
                                             insurance to indemnify the buyer or lender who suffers a monetary loss
12
     See the web site
                                             as a result of the streamlined system. In effect, the Protocol uses profes-
www.lawsociety.mb.ca/conveyancing.htm
                                             sional liability insurance (in effect, as title insurance) to protect the
for a summary of the Protocol.
                                             lender or borrower as to some of the risks against which title insurance
                                             offers protection. From the consumer’s point of view, both licensed title
                                             insurance and the Protocol offer insurance, albeit limited to only two
                                             risks under the Protocol.

                                             While the details of the TitlePLUS and Protocol programs are important,
                                             at this point it is sufficient to note that the legal profession has responded
                                             to the introduction of title insurance. The subsequent behavior of the
                                             legal profession is sufficient proof that the “old system” was not adequate
                                             to meet the needs of the changing marketplace.




                                                             –5–
4. NATURE OF TITLE INSURANCE
It is helpful to briefly explore the nature of the title insurance currently
offered in the market. There is no need to review these programs in detail
since other available materials fully describe the insurance features. It is
also useful to bear in mind that these insurance policies are not static and
are subject to changes in response to consumer demands and other market
forces.

What is the nature of title insurance? Basically two types of policies are
available in the market at the present time, one policy directed to lenders
and one policy directed to the residential purchaser. The purchaser’s
policy is designed to protect the purchaser’s interest in the property and
the lender’s policy is designed to insure the validity, priority and
enforceability of the lender’s mortgage.

These policies may originate in the market at two different occasions. At
the time of a property purchase, the purchaser and the lender, if one is
involved, are offered an opportunity to purchase title (and other) insurance
policies. If a lawyer (or notary) is involved in the conveyance, and this
appears generally to be the case, the lawyer may advise the purchaser
and lender of the opportunity to purchase title insurance (although the
lender may well be familiar with this option from its other mortgage
lending activities). In this case, one insurance policy is issued to the
purchaser and one to the lender. The premium for this type of insurance
is paid once, and the insurance remains in force for the time the insureds
maintain their interest in the property. Having been informed of the
nature of the insurance policies, the purchaser-owner and the lender, or
both, may decide that the insurance is not necessary.

The second occasion to purchase title insurance involves the issuing of a
mortgage that is not associated with the purchase of property (generally
the refinancing of an existing mortgage). This type of policy is only
available to the lender and its purpose is to protect the lender’s interest
and priority in the property. This insurance policy is not restricted to the
original lender at the time the property was purchased (and thus it’s util-
ity in the MBS market). A number of the title insurance companies have
arrangements in place to provide insurance on mortgages initiated by
specific lenders. In these circumstances, only the lender is insured as the
property owner is not participating in a property purchase. Some, perhaps
all, lenders give the borrower a choice between using either the lender
insurance program or retaining legal counsel. But there would be nothing
wrong with a lender insisting upon the insurance policy as a condition
of making the loan. In either case, the consumer (borrower-owner)
decides whether to retain legal counsel at this stage, but need not do so.
The borrower may rely upon the borrower’s own counsel or the lender’s
(regulated) description of the mortgage terms and conditions.



               –6–
4.1 Other Types of Insurance
It is worth noting that at the time of arranging a mortgage, the borrower
is often offered other types of insurance as well as title insurance. For
example, the borrower may consider mortgage life insurance policies,
accident and illness insurance policies, fire and line of credit life insurance
policies. A typical promotional brochure describes these policy options
as providing “protection and peace of mind.” The impact of these policies
may be as important under particular circumstances as the title insurance.
Incidentally, the same consumer protection concerns arise with respect to
these other policies, but little is heard from the legal profession on these
matters.

4.2 Lawyer’s Opinion
Prior to the introduction of title insurance, a lawyer’s opinion served to
provide comfort and assurance that the interests of the purchaser and
lender were protected to a certain extent. Lawyers clearly played an
important role in the conveyance and refinance processes. Similarly,
lenders would use a lawyer to ensure their interests were protected.
Often, in the interest of cost savings, one lawyer or notary would act for
both the purchaser and the lender, always one assumes with full disclosure
of the potential conflict between the interests of the purchaser and the
lender.

4.3 Regulation of Mortgage Lenders
It is helpful to remember that in the residential sector in Canada, the
major mortgage lenders are the banks and credit unions. These major
financial institutions use mortgage lending, in part, as a means of build-
ing other business for their institution. To this end, they have a strong
desire to ensure the mortgage lending activity works smoothly between
borrower and lender, since to do otherwise would be to risk the other
business relationships. The borrower is being asked to sign documents
prepared by the lenders, created most certainly with advice from their
own legal counsel to fully protect the lender. These documentations
used by the major lenders (whether a lawyer’s opinion or title insurance
is involved) comply with all existing government regulations, and if the
documentations do not comply, there are existing procedures in place to
address the defects. Moreover, these major institutions have moved to
streamline the mortgage lending process and have moved towards plain
language forms and advertising for mortgage lending purposes. The
competitive nature of the mortgage market has contributed to more uni-
form lending practices and an emphasis on cost reductions.


 5. ADVANTAGES OF TITLE INSURANCE PROGRAMS
There is a cost associated with the use of title insurance. The cost is
borne, directly or indirectly, by the property purchaser or borrower (as is
the cost of a lawyer’s opinion). This one time insurance cost, while low

                –7–
                                               relative to the cost of the underlying real property, is nevertheless a con-
                                               sideration. We need consider two aspects of the benefits of title insur-
                                               ance: those benefits enjoyed by the insured, and those benefits enjoyed
                                               by others (externalities which may be positive or negative)13.

                                               5.1 Direct Benefits
                                               The benefits enjoyed by the insured come in several forms. Before
                                               addressing the specific claims on behalf of title insurance, first consider
                                               the broad categories of benefits that may exist using title insurance. The
                                               direct benefits to the insured would occur when:
                                                 • Some insured event occurs that would not be covered by the more
                                                     traditional lawyer’s opinion, and the insured collects on the insurance
                                                     policy.
                                                 • Some insured outcome that would be covered by the more traditional
                                                     lawyer’s opinion occurs and the insured collects on the insurance
                                                     policy quicker or with less trouble than would occur with the use
                                                     of a lawyer’s opinion. This benefit may be less important to insured
                                                     lenders as they are more likely to have the capacity to wait for pay-
                                                     ments, but it may be critical to the purchaser/owner.
                                                 • Title insurance facilitates faster release of mortgage funds and sales
                                                     proceeds involved in the transactions.
                                                 • The cost of the title insurance is less than the cost of the lawyer’s
                                                     opinion, even overlooking any extended protection offered by title
                                                     insurance
                                                 • The comfort afforded the residential purchaser is in knowing there
13
     See Siebrasse, op. cit., pp17-52 for an
                                                     is a national insurance company, highly regulated and capitalized,
analysis of the potential and realized
                                                     and with significant reserves, insuring their interests. This need not
benefits of title insurance.
                                                     be rational on a strict cost-benefit basis as many benefits are difficult
                                                     to quantify. This does not necessarily imply a lack of confidence
                                                     in a lawyer’s opinion, but rather the knowledge that a nationally
                                                     regulated insurance company is there if needed.

                                               5.2 Indirect Benefits
                                               The indirect benefits to the insured occur when title insurance assists in
                                               attracting more funds, or lower cost funds, to the mortgage market than
                                               would be the case if only the opinions of lawyers were used across the
                                               market. This is one of the principal arguments relating to the develop-
                                               ment of the secondary market for existing mortgages.

                                               The benefits enjoyed by those other than the insured occur when title
                                               insurance assists in creating a more cost effective and efficient mortgage
                                               market. Even those property owners who do not directly participate in
                                               the title insurance program benefit from a more efficient mortgage market
                                               since this in turn assists in creating a more efficient, less expensive real
                                               property market.

                                               There is no need at this stage to dwell on the specific advantages of title
                                               insurance claimed by the insurance companies. These specific advantages
                                                               –8–
                                            are well documented in the promotional materials from the insurance
                                            companies, and are subject to change in response to market demands. If
                                            the insurance companies have misrepresented the advantages claimed
                                            on behalf of title insurance, then the misrepresentations should be
                                            addressed, and there are several processes in place to address false or
                                            misleading advertising. But the evidence does indicate there are benefits
                                            from the use of title insurance, even in a Torrens system of land registration,
                                            and the insurance companies understandably put these in a favorable
                                            light in their marketing activities.

                                            5.3 Historic Impact of Insurance in Canada in
                                            Facilitating Mortgage Availability
                                            It is possible to gain some insight as to how insurance can impact the
                                            mortgage market by looking back at the impact that mortgage loan
                                            insurance played in Canada beginning in the mid-1950s. Prior to the
                                            introduction of mortgage default insurance, first offered exclusively by
                                            Canada Mortgage and Housing Corporation (“CMHC”), major residen-
                                            tial mortgage lenders were limited to a low loan-to-value ratio, and in
                                            the absence of some risk management tools, appeared unwilling to
                                            change their loan-to-value ratios. With the introduction of the CMHC
                                            mortgage default insurance, all financial institutions involved in residential
                                            mortgage lending began to offer higher-ratio (up to 95%) mortgages, if
                                            the mortgages were insured by CMHC14. There is no doubt that CMHC
                                            mortgage insurance initiative was a major factor in creating the modern
                                            residential mortgage system in Canada, and in attracting the chartered
14
     Private mortgage insurance providers
                                            banks to this market. Today it is hard to imagine how we could have the
now operate in Canada in addition to
                                            residential mortgage market we do without the participation of our
CMHC.
                                            major financial institutions. Similarly it is difficult to imagine how acces-
                                            sibility to home ownership could be maintained if lenders were limited
                                            to loan-to-value ratios of 75%, implying down payments of 25%. It is
                                            perhaps helpful to note that in 1992, CMHC officially began accepting
                                            (and continues to accept) a policy of title insurance, as an alternative to
                                            a property survey, for mortgage insurance purposes.


                                            6. SPECIFIC DISADVANTAGES OF TITLE INSURANCE
                                            TO THE INSURED

                                            6.1 Do Additional Benefits Exist?
                                            What is the downside of the use of title insurance to the insured? The
                                            most obvious possible downside is that the insured pays for an insurance
                                            policy that has no added benefit to them. Consider first whether the
                                            lawyer’s opinion currently covers all risks. This is difficult to support
                                            since it is clear that title insurance programs do include some risks that
                                            are not covered by the lawyer’s opinion. Indeed the legal professions in
                                            Ontario and in the western provinces have acknowledged this by altering
                                            the services they provide to cover some of the additional risks addressed
                                            by title insurance.
                                                            –9–
6.2 Are Costs Excessive?
The second potential disadvantage is that the added risk coverage
afforded by title insurance is not cost effective. This ignores the fact that
title insurance, at least generally on a refinancing, costs less than the
legal fees charged by the profession to provide a narrower coverage than
title insurance. Indeed, it is, in many cases, less expensive than a property
survey. One of the arguments advanced concerns the cost effectiveness of
title insurance and the “rumored” low “payout”, implying that insurance
companies are making unreasonable profits. First, there is no datum to
support this suggestion. All we know is that title insurance premiums
are part of a very competitive market. Second, it is necessary to under-
stand that the “payout ratio” is, of and by itself, not a useful measure.
An insured is also buying “peace of mind” when buying title insurance
and one suspects that most policy holders would be delighted never to
make a claim on the policy. Consider the use of fire insurance. Except
in unusual cases, the insured hopes there will never be a fire.

The evidence in support of the argument that profits are excessive is
suspect for four reasons. First, the evidence itself is very incomplete.
Thus far there are no comprehensive industry statistics supporting a
conclusion of excess profits in the industry. Short term statistics, and/or
statistics on a single insurance company are simply inadequate. Second,
the information in Canada relating to payout ratios and/or profit levels
applies to a type of insurance policies that are reasonably new. Many of
the problems covered by the insurance policies, if they exist, may not yet
be exposed. Third, this concern for low payout ratios, hence excess profits,
completely ignores the fact that title insurance is a competitive industry,
and the competition serves to drive profits in the industry to a normal
level. Moreover, one might reasonably expect that insurance companies
will continue to refine their costs structure and insurance fees as they
gain additional meaningful experience in the Canadian market. Fourth,
whatever the payout ratio, title insurance payouts can logically only be
compared to those on lawyer’s opinions, ofwhich we have no data.

If the insured is the lender, then the argument that the insurance profits
are excessive has virtually no validity. The lenders in Canada include the
largest national and provincial financial institutions, institutions that are
experts in evaluating costs and alternatives. If they conclude that title
insurance from a particular insurer at a particular cost makes sense for
them, their considered business judgments should answer the argument
that costs are excessive.

If the insured is the residential consumer, most will not be expert in such
analysis. In this case, there is an argument for consumer protection to
ensure the consumer is informed about the costs and benefits of title
insurance. This is typically done by requiring the service provider to dis-
close information in a standard format using plain language. There are
several regulatory and legislative provisions designed to ensure this.

               – 10 –
Moreover, it is in the supplier’s best long-run interest to provide such
information since publicity concerning a poor product or service ulti-
mately impacts their future business.

6.3 Building Relationships
What seems to be forgotten in the rhetoric of the legal profession relating
to title insurance and the consumer is the fact that the financial institutions
are much more likely to have an ongoing relationship with the borrower
than will the lawyer offering an opinion. A property purchaser and/or
consumer seeking a new mortgage on a property they presently own may
meet a lawyer on one or two occasions and potentially have nothing else
to do with the lawyer until the next transaction, or indeed often never
again. The consumer may never have met the lawyer previously. In
contrast, the same borrower may be dealing with the bank or credit
union on a daily basis. Available data suggest that the typical consumer
purchases a residential property every 9 to 11 years. The same consumer
is likely making monthly mortgage payments to the lender and likely
banking at the bank or credit union that provided the mortgage. The
borrower, when it comes time to refinance the mortgage, logically looks
to the existing lender as a source of refinancing. It is in the lender’s best
interests to build the trust to ensure this happens.

Somehow forgotten in much of the analysis concerning title insurance is
the fact the both the insurance companies and the mortgage lenders are
large national organizations. They are highly capitalized. They are
heavily regulated. They carry substantial reserves. And they have their
reputations at stake. Profits are critical to most of these organizations,
but long term profits, not short-term gains derived from providing mis-
leading or incomplete information, are the key to their success. These
organizations, provincial, national and international in scope, have
significant capital at risk and must answer to their shareholders or members
as well as federal and provincial regulators.

6.4 Regulating Financial Institutions
If the evidence indicates that financial institutions are not observing the
legislated steps, or that their business practices are contributing to a
problem, then some appropriate action is required. However, there
appears to be no evidence of this that would stand any test of reason-
ableness, and if evidence did exist to indicate a problem, the appropriate
regulating bodies are the obvious source of action. In the case of the
mortgage lenders, the banks, credit unions and even the mortgage bro-
kers are subject to well-developed regulatory systems, systems that are
the envy of the global financial community. In the case of insurance
industry, there is also a well-developed regulatory system in Canada. It
has been suggested that the regulation of title insurance in Canada is not
as comprehensive as in the USA. First, there appears to be no evidence
that this is the case. Second, even if it were so, that is no evidence that
there is a problem. In Canada, federally incorporated title insurers
                – 11 –
                                          (which most are, TitlePLUS being an exception) are regulated both
                                          federally and provincially (in each province in which they do business).
                                          As a result they carry significant reserves (as opposed to most professional
                                          bodies which have more limited reserves. Third, in the normal course of
                                          events, consumer protection laws and regulations are introduced either
                                          in the face of factual evidence that there exists a problem (responsive
                                          consumer protection), or where there exists a very high risk associated
                                          with a potential problem (in anticipation). Neither circumstance appears
                                          to be the case with respect to the title insurance programs existing in
                                          Canada.


                                          7. INDIRECT DISADVANTAGES OF TITLE INSURANCE
                                          Several important potential indirect disadvantages of title insurance have
                                          been cited in the various reports in Canada. The major points include:
                                            • Impact on the integrity of the land registry systems;
                                            • Impact on the integrity of the land planning systems;
                                            • Impact on consumer access to legal services;
                                            • Unauthorized legal practice of law; and
                                            • Promoting the use of “tied contracts.”
                                          While these potential disadvantages have received varying degrees of
                                          attention, there is little reliable evidence to suggest problems actually
                                          exist.

                                          7.1 Impact on the Integrity of the Land Registry Systems
15
     See Manitoba Law Reform Commission
and Law Reform Commission of
                                          The potential impact of private title insurance on the integrity of the
Saskatchewan, op. cit., Consultation
                                          public land registry systems appears to rest on the argument that the title
Paper, June 2005, pp26-29.
                                          insurance companies simply “insure over” issues and do not take the
                                          necessary steps to correct known errors within the land registry systems15.
16
     See Manitoba Law Reform Commission   This argument includes reference to the possibility that title insurance
and Law Reform Commission of              companies may not execute all discharges in a timely manner. This may
Saskatchewan, op. cit., Consultation      indeed occur in the USA where private firms have a vested interest in
Paper, June 2005, pp 29-31.               keeping information to themselves. However, in Canada the various
                                          land registry systems are a core integral part of the existing processes
                                          relied on by title insurance companies in their underwriting, and it is in
                                          the best interests of all title insurance companies in Canada, just as it is
                                          in the interest of the legal profession, to ensure these systems remain
                                          strong. These systems are of significant value in the title insurance
                                          process and their absence would add considerably to the cost side of the
                                          title insurance without adding profits in the process.

                                          7.2 Impact on the Integrity of the Land Planning Systems
                                          The second point raised relates to the role title insurance may play in
                                          maintaining the land planning system16. This issue has two components:
                                          the integrity of the land subdivision process and the integrity of the
                                          development systems. The former refers to the subdivision of lots and the
                                          potential that a structure may extend beyond the appropriate boundaries


                                                         – 12 –
                                           and into an adjacent property. If a survey is used, the majority of potential
                                           problems are identified at the time of the conveyance and either corrected
                                           or the seller may be required to compensate for the problem. In this case
                                           problems are identified, and both the land registry offices and local
                                           government can be made aware of the problems. If no survey is done,
                                           title insurance or the Protocol provide the insured a degree of coverage,
                                           but do not, by themselves, correct the existing records. In the second
                                           instance, an opinion from the local government as to the correctness of
                                           the development on the site at the time of the conveyancing would alert
                                           the buyer who could then require the seller to remedy the problem or
                                           adjust the price accordingly. Once again the public records may, but not
                                           necessarily will, be corrected to reflect these problems. Title insurance
                                           provides the insured coverage for the problems not identified because no
                                           opinion was obtained from the local government.

                                           Two arguments are advanced as to the scope of these issues. First, the
                                           maintenance of the public records is not augmented by the buyer identi-
                                           fying the issues and either correcting or reporting them. As a consequence
                                           the system is eroded. Second, the local government must then increase
                                           its budget to compensate for the fact the buyers are not generating some
                                           of the information on land surveys and condition of structures. However,
                                           there is no compelling argument that suggests that maintaining the public
                                           system should be financed in whole or in part by the buyers or sellers.
                                           The public system benefits everyone, not just those involved in a
                                           conveyance. A broad based taxation system appears to be much more
16
     See Manitoba Law Reform
                                           equitable as a means of financing the system of land surveying and
Commission and Law Reform
                                           regulation of development.
Commission of Saskatchewan, op. cit.,
Consultation Paper, June 2005, pp 29-31.
                                           It is also necessary to ask about the scale of these issues relative to the
                                           cost of additional surveys or opinions. At least in some jurisdictions in
                                           Canada (including British Columbia), the legal profession has concluded
                                           that the site survey and opinion that is available from the local government
                                           is not necessary. This suggests that they have concluded that the risks
                                           are low and that the need to protect the public system of land planning
                                           is not entirely compelling.

                                           7.3 Impact on Consumer Access to Legal Services
                                           A matter of considerable concern relates to the role of title insurance and
                                           consumer access to legal services. Arguments have been advanced to
                                           suggest that title insurers may not make consumers aware of their right
                                           to access legal services. This is alleged to occur by omission or by over-
                                           stating the benefits of title insurance relative to a lawyer’s opinion. Title
                                           insurers have no direct contact with consumers. Why would a lender, a
                                           major financial institution with much at risk, not make the consumer
                                           aware of the options? The consumer is paying for the options, not the
                                           lender. Having said this, there is a compelling argument that a consumer
                                           may feel more comfortable buying insurance from a nationally regulated
                                           insurance company rather than accepting the opinion of a lawyer,

                                                          – 13 –
potentially a lawyer that they may meet for the first time. It is argued
that consumers may not fully understand the details of the title insur-
ance program, but one suspects the vast majority of consumers also do
not understand the (limited) protection afforded by a lawyer’s opinion.
In the eyes of a consumer they have insurance as opposed to an opinion.
Moreover, consider the risk to the lender. Assume the lender does not
explain the choice of using a lawyer and something goes wrong. The
consumer then has the opportunity to sue the lending institution.
Lenders are aware of this risk.

If there is evidence that lenders are not advising consumers of this option
to seek legal advice, then there may be a need to strengthen the regula-
tions of these financial institutions (or enforce the existing regulation
that exists). But before doing so, one would hope that the evidence
would be much more compelling than that which has been offered to
date. A handful of specific examples are hardly symptomatic of a
problem warranting broad-based regulatory intervention (whether by
government or a profession).

7.4 Unauthorized Practice of Law
An issue has been raised in the various reports concerning the fact that
title insurance companies may be performing activities reserved for
lawyers. If this is the case (and there appears to be a strong difference of
opinion on this matter), there are well-established processes to address
this issue and it should be addressed. The legal profession has both a
right and responsibility to protect the activities they alone are mandated
to perform. Presumably in this matter, the title insurance companies are
entitled to a “presumption of innocence” until the matter is resolved. At
least in the province of British Columbia there does not appear to be any
judicial proceedings the Law Society of British Columbia has brought so
that this issue can be addressed by the courts.

7.5 Promoting the Use of “Tied Contracts”
An issue is raised concerning the lenders’ increasing use of cross-marketing
of services. In the case of mortgage lending, this may extend to cross-
marketing banking services, credit card services and, potentially, life
insurance services. The cross-marketing may extend to third party
arrangements. This practice is by no means limited to mortgage lenders
as many of our major businesses are extending their marketing efforts. The
concern relating to cross-marketing is the potential to restrict consumers’
choice. This may take the form of restricting consumers’ choice of a
lawyer or title insurance company, consumers not being informed that
third party services are used or that fee arrangements exist between the
lender and any third party service supplier. These concerns are not
unique to the mortgage lending industry. As an example, virtually all
financial services or products face similar expressions of concern.
Indeed your medical doctor, accountant, veterinarian, etc. may also have
elements of tied services.
               – 14 –
                                                  If there is clear evidence that tied services and cross-marketing is creat-
                                                  ing problems for consumers (whatever the area of consumer-business
                                                  interaction), then action should be taken. Canada has well-established
                                                  means of addressing tied selling of goods and services under the
                                                  Competition Act, but the cross-marketing of services and goods is
                                                  permitted as long as: consumers continue to have choices, there are benefits
                                                  for the consumers, the services are available to all consumers, and access
                                                  to one service or product is not conditional upon buying another.


                                                  8. USA EXPERIENCE
                                                  Frequently reference is made to the operation of title insurance in the
                                                  United States17. Clearly Canada can benefit from some of the lessons of
                                                  the USA, but must do so by considering not only the activities of the title
                                                  insurance companies, but also the regulatory framework within which
                                                  they and the USA mortgage lenders operate. The capital markets in the
                                                  USA rely to a much greater degree on state controlled (in some cases
                                                  even county controlled) institutions whereas Canada has a much
                                                  stronger national system for both banks and insurance companies. This
                                                  results in a more fragmented regulatory system in the USA than exists in
                                                  Canada. Four other factors need to be considered when citing evidence
                                                  from the USA:
                                                    • First, the process of closing in a real estate transaction is more het-
                                                        erogeneous in the USA as the role of the legal profession varies
                                                        across individual states. In contrast, in Canada the role of the legal
17
     See Lipshutz, op. cit. and B. Ziff, “Title
                                                        profession in real estate closings is much more homogeneous;
insurance: The big print giveth but does
                                                    • Second, the public land registry systems in the USA are not as well
the small print taketh away,” in D.
                                                        developed and managed as they are throughout Canada. Whatever
Grinlinton, ed. Torrens in the 21st
                                                        the original cause, the USA public systems do not afford the pro-
Century, LexisNexis, 2003 for a summary
                                                        tection or comfort one finds with the Canadian systems. The
of the role of title insurance in United
                                                        Canadian systems may have flaws, but the core of the systems is of
States.
                                                        high quality;
                                                    • Third, as a consequence of the weak public titles registry systems,
                                                        the conveyancing system in the USA includes a much larger role
                                                        for the private sector and many of the title insurance companies have
                                                        developed close working relationships with private conveyancing
                                                        firms, a fact that contributes to the much higher title insurance fees
                                                        in the USA; and
                                                    • Fourth, to emphasize, there is no direct federal regulation of title
                                                        insurance in the USA. The regulation of title insurance is solely by
                                                        the states (ranging from benign neglect to regulation on a par
                                                        with Canada). The greater role of the state results in more varied
                                                        regulatory practices. Having said this, the indirect role of the
                                                        Federal Government in the USA through the Real Estate Settlement
                                                        Procedures Act does compensate to some extent by requiring a more
                                                        uniform standard of conveyancing.



                                                                 – 15 –
If one wants to cite the USA experience, then it is essential that the analysis
consider the overall structure of the financial institutions, and not simply
isolated problems. In some cases the state or county directed regulatory
systems themselves contribute to the problems. And most certainly the
differences in state or county directed enforcement is a contributing
consideration.


9. CONCLUSIONS
Title insurance is now an important and valuable part of the conveyancing
and mortgage lending scene in Canada. It is part of a broader set of
changes occurring in the real estate sector and capital markets in
Canada, changes made in response to consumer demands. In the
process of change, some traditional systems and practices that have
served us well in the past will be gone and some service providers will
need to adapt to the changing circumstances. As with all change, there
will be some problems and challenges. We need to address the problems,
but do so in a responsible manner that protects the integrity of our existing
systems while encouraging improvements. The evidence is compelling
that our land conveyancing systems needed to be supplemented and the
legal profession, by its own actions, has accepted this.

It is obvious that the market has accepted the role of title insurance. All
those consumers that have accepted the product cannot be wrong or
poorly informed. Indeed little actual evidence exists to suggest there are
any but isolated problems. The business model of our major mortgage
lenders suggests that it is in their best interests to act responsibly in their
relationships with the consumers. Indeed these financial institutions
likely have more contact, and more ongoing contact, with the consumers
than do the lawyers involved in the conveyancing processes. They also
have greater opportunities to build other business with the borrower-
consumer, hence a great incentive to ensure a satisfied consumer

It is sometimes argued that the title insurance company has less incentive
to protect the consumer and keep fees reasonable since they only deal
with the consumer infrequently. If the average conveyance is every 9 to
11 years and the average new mortgage is every 5 years, as the available
data suggests, then surely the title insurers have infrequent contact. The
same can be said for lawyers and their contact with individual consumers.
But the infrequency of consumer contact is not a compelling argument
since the title insurance companies would not be able to exist if the
lenders did not support them, and it is doubtful a lender would risk their
consumer relationships, relationships critical to the success of their busi-
ness, by continuing a relationship with a title insurance company that
was not consumer aware. Moreover, lenders have a strong incentive to
ensure that title insurers keep fees low since these fees impact the overall
cost of a mortgage or conveyance. Furthermore, title insurance and legal


                – 16 –
services are not the only aspects of the real estate system that have
infrequent contacts with the consumer. The real estate broker faces the
same challenges as they have significant contact with the seller or buyer
on average every 9 to 11 years. Real estate brokers face the same com-
petitive pressures on fees and services.

Markets will, of course, continue to change in response to new competitive
pressures, new products and services and new technologies. Consumers
should be made aware of the new opportunities.




               – 17 –

				
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