What is Title to Real Estate (Title) or Securities Insurance?
Title Insurance refers to a set of transactional risk insurance products which protects against financial loss arising out of issues affecting legal ownership (title) and/or use of a target property.
It is a tailored policy that responds to unknown risks and some known risks that give rise to an insured event under the policy (independent of the sale agreement) and responds on an indemnity basis. It is used by sellers, buyers and lenders of commercial real estate.
Such policies can be purchased in connection with an asset sale or a securities sale where the underlying asset(s) held by the target is real property (or a portfolio of properties). It is acquired during a transaction e.g. sale of real estate, refinancing of real estate, development of real estate.
How does Title Insurance interact with the Torrens System?
In Australia, most land is registered under the Torrens title system which provides a State guaranteed indefeasibility of title upon registration. Whilst this system offers robust protection for registered proprietors, it does not eliminate all risks associated with property ownership and use.
Indefeasibility is subject to a number of statutory exemptions, including fraud by the registered proprietor, prior folio certificates of title, short leases, easements acquired by prescription (or statute), and certain overriding interests recognised under State and Territory legislation.
Beyond the above exceptions, there are also significant risks which fall outside of the Torrens guarantee altogether. For example, unregistered interests, adverse possession claims (depending on the jurisdiction) and planning non-compliance are all examples of matters which are not addressed on the register. The register simply confirms ownership.
Title insurance is particularly relevant in securities transactions, such as share or unit sales, where the Torrens guarantee will have no direct application. In these types of transactions, the land title itself is not transferred, the ownership of the entity holding the property is simply changing hands meaning that any pre-existing defects pass through to the new buyer without any of the protection that registration would have otherwise provided.
What is not covered?
Typically, title insurance policies do not cover:
- Risks known to the policyholder but not disclosed to the insurer prior to inception of the policy.
- Environmental contamination or liability incurred under environmental legislation e.g. contaminated land.
- Matters arising after the inception date – the policy protects the policyholder against defects and adverse matters that existed at, or prior to inception.
- Losses arising from the policyholder’s own fraud.
- Losses arising from claims which the policyholder creates, for example, the policyholder carries out building works without obtaining prior council approval.
What is covered?
The policy provides cover for insured events relating to fundamental risks (title, capacity, ownership) and can also address certain real estate specific risks around pre-existing easements and covenants that impact ownership, occupation and use.
Key terms
- Premium: One-off payment due at inception.
- Policy duration: From inception until the policyholder disposes of the asset.
- Operates as a standalone policy, independently of the sale agreement and the warranty and indemnity (W&I) insurance policy (if in force).
- Defence Costs: Most policies will cover the policyholder for the reasonable legal costs incurred in defending a claim, subject to the policy limit.
- Subrogation: Following the payment of a claim, insurers will retain the right to pursue the party responsible for the loss (this is done regularly).
Limit of indemnity
The limit of indemnity under a title insurance policy is typically set by reference to the purchase price, property value or loan amount (for lender policies). The limit should always reflect the full potential exposure of insurers, including any uplift for anticipated increases in the property value.
Unknown risks
A Title insurance policy protects the policyholder against pre-existing unknown issues that relate to ownership and use of the target property that were not disclosed by the Seller or identified during due diligence. These unknown risks are captured by a set of insured events which mirror a typical set of title and capacity warranties that would be expected to be negotiated between a buyer and a seller under the Sale Agreement.
The premium for such a policy would be expected to be in the range of 0.15% to 0.5% of the insured limit.
Specific Known Risks
A Specific Risk insurance policy protects the policyholder against pre-existing known risks that relate to ownership and use of the target property.
The premium for such a policy will depend on the nature of the specific risk.
Risks where the relevant third parties are known to be aware, but the issue is not in active dispute, typically attract a higher premium than risks that are identified but ‘dormant’ with no indication that the relevant third parties are aware/inclined to make a claim.
Insurable Known Risks under a Specific Risk policy
Examples of insurable risks which affect ownership include (but are not limited to):
- Title defects, including missing or deficient records and/or an inability to verify the chain of title, introduce the risk of potential legal disputes over the ownership, use, or transfer of the property.
- Third party rights including potential or known third party rights, and lack of evidence of discharge or termination of historical third-party rights.
- Missing third party consents due to inability to obtain such consents (including missing shareholders or titleholders) or uncertainty whether third party consents are required.
- Missing or unknown shareholders/unitholders.
- Actual or potential third-party rights affecting title to the shares/units.
- Defects or adverse interests arising from reservations and conditions contained in the original Crown grant, or from historical Crown land boundaries which do not align with the property as currently occupied.
Examples of insurable risks which impact access or use include (but are not limited to):
- Unapproved / illegal building works, including breaches of or unfulfilled planning obligations / conditions and zoning breaches.
- Issues with or missing permits, including building, planning occupancy permits.
- Actual or potential breach of easements, restrictive covenants and other rights or restrictions.
- Actual or potential third-party rights to access and use of the property.
- Pedestrian or vehicular access issues, including the lack of necessary rights to use or access the property for services.
- Heritage listing status which is not identified during due diligence.
Example claims scenarios
The below examples illustrate how a title insurance policy may respond in practice:
1. Fraudulent prior transfer
A commercial property is acquired in Melbourne. It later emerges that a prior transfer of the property was procured by identity fraud and the registered proprietor’s title is challenged. While the Torrens system may ultimately protect the registered buyer, the title insurer covers the legal defence costs and any interim loss during the period of uncertainty, including where the Registrar of Titles exercises a power of correction under the Transfer of Land Act 1958 (Vic).
2. Undisclosed restrictive covenant
Following the acquisition of a Sydney industrial site, the buyer discovers a restrictive covenant on the folio prohibiting use of the property for anything other than residential purposes, which was missed during the due diligence phase of the purchase. The title policy indemnifies the diminution in value arising from the restriction on the intended commercial use.
3. Missing easement for access
A warehouse property in Brisbane relies on vehicular access over a neighbouring lot, but no formal easement is registered on the title. The neighbour obstructs access following the policyholder’s purchase. The insurer would cover the cost of negotiating and registering a formal easement on the title or the resulting loss in property value (up to the limit of indemnity).
4. Unapproved building works
A local council in Perth issues an enforcement notice for building works carried out by a prior owner without development approval under the Planning and Development Act 2005 (WA). The policy covers the cost of retrospective approval or the financial loss, including any loss in property value if the works must be removed.
5. Competing ownership claim in a securities transaction
In a unit trust acquisition of a property portfolio, a third party emerges claiming beneficial ownership of units in the trust. The policy covers the defence costs and any settlement or loss suffered by the insured.
Please reach out to the Transaction (M&A) and Contingent Risk team to discuss how title to real estate or securities insurance can support your transaction.
