A necessary transaction cost which protects against title issues
TL;DR: Title insurance is a type of insurance policy which protects against the costs if a title defect is discovered. For example, violation of municipal zoning bylaws, an existing work order, property taxes that are overdue from a previous owner, or encroachments on adjoining property are all examples of title issues that can have a serious downward effect on the value of the property. This is where title insurance comes into play.
What does it protect against?
Encroachments
Sheds, laneways, homes and garages are sometimes unintentionally built on neighbouring properties and need to be moved. This can easily happen if a previous owner built without verifying where the lot lines were. A title insurance policy can protect against financial loss associated with encroachment issues.
Fraud and forgery
If someone forged a homeowner's signatures without their knowledge and registered a fraudulent mortgage on their home, the onus is on the homeowners to prove that fraud was committed. This can be very costly – financially and emotionally – to resolve. A title insurance policy can cover the legal expenses and costs to prove that fraud was committed.
Tax and utility payments
If the previous homeowner was not up-to-date on payments and the accounts are in arrears, a title insurance policy can cover the outstanding payments.
Title defects
Title defects such as charges, liens or encumbrances that could affect the title to the property and affect the property's value, or which could cost significant amounts of money to rectify, can be covered by a title insurance policy.
Municipal issues
If improvements were made to the home before it was purchased (i.e. the basement was finished, an addition was built, or a deck was added), it could be discovered after closing that the required permits were not obtained. At any time, the local municipality could force the homeowner to remove or remedy the improvement, which could cost thousands.
Who does it protect?
Lenders all now require you to purchase a title insurance policy to protect their interest in the property - their interest being the mortgage they are lending, using the property as security for that loan. The policy you are required to put in place protects the lender. There is a homeowner add-on which can be purchased for a small fee. It is worth discussing this with your lawyer.
How much does it cost and how do I pay for it?
Title insurance is a one-time expense, and is billed to you by your lawyer at the same time as your legal fees. It can cost anywhere between $150 and $400, depending on whether or no you select the homeowner add-on, and which title insurance provider your lawyer is using.