Title Insurance: What a Lender Reads in the Policy

Most land in New Zealand and Australia sits on Torrens registers, and most in England and Wales on HM Land Registry's. A registered title is, with exceptions, what the register says it is, and a person who loses because the register was wrong can claim from the state. In England and Wales, the Land Registration Act 2002 gives an indemnity for loss caused by rectification of the register or by certain mistakes in it, and treats the holder of a registered charge that turns out to be forged as having suffered that loss where the register is rectified. New Zealand and the Australian states have their own compensation schemes.

What the register does not show is where title insurance earns its premium. It records who owns the land and which interests are registered. It does not say whether an extension had a building consent, whether a neighbour's carport crosses the boundary, whether the right of way a business uses was ever granted, or whether rates are unpaid. State compensation also has limits of its own: in England and Wales it is reduced, or refused, where the claimant's own lack of proper care caused the loss.

Two kinds of policy reach a credit file. A general title policy, sold to owners and lenders mainly in Australia and New Zealand, insures a list of risks without anyone knowing of a specific problem: fraud and forgery, unregistered interests, encroachments, unapproved building work, unpaid rates, up to a sum insured. A lender's version insures the lender's interest as mortgagee, and some lenders accept one in place of searches or a survey they would otherwise require, which is where refinancing meets it. In England and Wales a narrower search indemnity policy does a similar job on many remortgages, standing in for the local authority search.

A defective-title or legal indemnity policy, common in England and Wales, insures one defect that is already known: no registered right of way over a lane the property has used for decades, a breach of an old restrictive covenant, an extension built without building regulations approval. Buyer and lender accept the defect, and the policy pays if someone with standing enforces it.

Exclusions decide what has been bought. Policies commonly exclude matters the insured knew and did not disclose, problems the insured created, and physical condition or contamination. Defective-title policies commonly lapse if the insured approaches the person who could enforce the defect, because the approach invites the claim.

A restaurant business in England, constructed for this page like every figure in it, buys the freehold of its site for US$2.4m with a loan of US$1.5m. The searches show that deliveries and refuse have gone through a rear lane for years over a neighbour's land, but no right of way is registered. A formal grant could take months and might prompt a demand for payment, so the buyer's solicitor arranges a defective-title policy: one premium, the lender named as an insured alongside the owner, a sum insured of US$2.4m. A valuer advises that without the rear access the site would be worth US$1.9m.

In the first version, the policy does its job. The neighbour sells, the new owner fences the lane, and the policy pays the loss in value and the costs, so the business can buy a right of access or rework its deliveries. The lender's own loss would arise only if the security fell short of the debt, which here it does not. What it gained was security that does not lose a fifth of its value without compensation.

Change one fact. Two years on, the restaurant's manager writes to the neighbour asking for a formal right of way. The neighbour refuses and blocks the lane. If the policy carries the usual condition against approaching the neighbour, the claim may fail, and the lender holds security worth US$1.9m against US$1.5m of debt, with no compensation behind it. Same defect, same policy: a condition decided the cover.

State compensation answers when the register itself must be corrected or was wrong. Title insurance can answer off the register as well, and pays on the policy's terms without the insured first proving a registry mistake. Neither replaces the other, and a lender's policy does not replace the checks a mortgagee must make on the borrower either: in New South Wales, for one, the statute requires the mortgagee to take reasonable steps to verify that the person signing the mortgage is who they claim to be.

A lender also weighs the policy against its lawyer's report on title. The report is a professional opinion, with a negligence claim behind it if it is wrong; the policy pays without anyone being at fault, but only within its wording. Some files use both.

DEFINED IN ONE PARAGRAPH → · LVR, SECURITY AND COLLATERAL → · WHAT YOUR BANK HOLDS AS SECURITY →

In a refinance, an incoming lender's conditions may accept a policy as an alternative to some searches, and the credit officer reads which searches were dropped and what the policy excludes in their place. On a purchase with a known defect, the question is whether insured-but-unfixed title is acceptable security. That turns on what the defect would do to the property's value and to a sale on enforcement, when a buyer and the buyer's lender will read the same problem. The valuer needs to know of the defect, because a valuation that assumes clean title answers a different question.

For the borrower the policy is usually quicker and cheaper than a cure, but the defect stays. The file should record the policy, the named insureds and the conditions, so that nobody in the business writes the letter that ends the cover.

REFINANCING AND SWITCHING BANKS → · THE SOLICITOR'S UNDERTAKING → · MORTGAGEE SALE →