Why do lenders need Title Insurance?

The last thing borrowers want at closing is an additional cost, yet the lenders are almost all requiring title insurance now.  Why can’t we just rely on the lawyers’ opinion like we used to?

The primary reason is that title insurance covers the lender for things that a lawyer’s opinion does not.

Perhaps the most important of these is fraud – namely, identity fraud.  A lawyer’s opinion does nothing to protect a lender for loss arising out this increasingly common type of fraud.  For example, how do we know that John Smith, with legitimate John Smith ID, is the same person as the John Smith named on title to the property to be mortgaged?  The short answer is that we don’t.  Without title insurance, that mortgage could be a complete loss for the lender.

Another reason is the fact that the title insurer will cover the lender’s legal costs to enforce the mortgage if the validity, enforceability or priority are challenged.  If you’ve ever had to pay a lawyer’s bill, you’ll know that this can add up to a significant benefit for the lender.

Of course there are the other 30 or so covered risks that are also beneficial to a lender like survey coverage, gap coverage, title problem coverage etc., but in the end the title insurance provides an additional layer of protection for the lender (and most importantly the lender’s investors) far greater than what is afforded by a lawyer’s opinion.  That is why it has now become the industry standard in Canada, especially for private and non-bank lenders.