Title Insurance

As the name suggests, title insurance is a type of insurance that helps protect buyers and existing homeowners against financial loss caused by unexpected issues relating to the title and ownership of property that may arise after settlement.

Whilst home and contents insurance is intended to protect the physical structure of the property and your possessions from future damage (e.g. caused by flood or fire), title insurance is designed to protect you from claims against the property title itself (for more information on home and content insurance please refer to: https://www.maplawyers.com.au/pre-settlement-home-insurance/).

As such, title insurance does not replace home and contents insurance, and we recommend you consider both.
Title insurance also does not replace the need for pre-purchase due diligence, such as building and pest inspections or council searches.

To purchase a title insurance policy, there is a once-off payment, rather than ongoing payments. The policy will then cover you for the entire time you own the property. The amount payable will depend on the property value.

BELOW WE HAVE COMPILED INFORMATION ON THE FOLLOWING:

The pros and cons of title insurance
Cost of title insurance
What does title insurance cover
Unapproved works
Vendor disclosure obligations
Case study 1 – High value property
Case study 2 – Risk that minor works may not be approved

1. THE PROS AND CONS OF TITLE INSURANCE

PROS

Provides protection for unknown risks after settlement
A one off lump sum premium is payable, and coverage is generally for the life of ownership of the property
If there is no right of termination under a contract for unapproved works, taking out title insurance may be advisable

CONS

In relation to a claim for unapproved works, if you have knowledge that works are not approved, coverage may be excluded or reduced
In relation to a claim for unapproved works, the maximum amount claimable may not be sufficient to cover the cost of major additions or alterations (i.e. it may be sufficient to cover a small deck or pergola but not necessarily a significant extension involving multiple bedrooms and bathrooms).

2. COST OF TITLE INSURANCE

The cost of title insurance will vary from property to property, however in general the cost will be dependent on the purchase price of the property and risk factors associated with the property.

Should you wish to consider title insurance, an online calculator can be found below from Stewart Title Australia: https://www.stewartau.com/consumer-resources/consumerlibrary/premium-schedules

*We note we are not affiliated with Stewart Title, but previous clients have used them and been satisfied with their experience.

3. WHAT DOES TITLE INSURANCE COVER

Whilst it will depend on the particular policy, title insurance can assist with a multitude of scenarios, including but not limited to:

Non-approved building works on the property, for example a deck was added by a previous owner but they did not obtain the necessary council approval
Boundary errors and encroachments, for example you discover that your fence encroaches onto the neighbouring property and must be relocated
Compulsory land acquisitions by the government, if the government had the right to acquire some or all of the land prior to your purchase and you did not have knowledge of this
Errors made by local councils in reporting charges, for example a local authority assesses additional rates against the property after settlement for a period prior to the policy date
Another person’s fraud, for example a scammer may take out a fraudulent mortgage against your property
Non-compliance with zoning or planning laws or unregistered easements or covenants which impact your use of the property

If issues are identified post-settlement, the policy may cover the cost of rectifying unapproved structures (up to a set limit, depending on the policy) or negotiating with neighbours over encroachments, for example.

It is important to read the policy disclosure statement carefully to understand what is and isn’t covered. In particular, if you have knowledge of an issue prior to purchasing the policy, exclusions or limited caps may apply. For example, if you order a council approval search during the conditional period and discover that a deck does not have final approval, the title insurance policy may either exclude any claims in relation to this deck, or place a reduced cap on what you can claim if there are future problems.

Depending on the policy, different caps may apply for unapproved works versus other issues, such as encroachments. Different terms may also apply to rural properties or properties over a certain size.

4. UNAPPROVED WORKS

Title insurance generally covers unapproved structures. However, as noted above, if you have knowledge of an unapproved structure prior to purchasing the property (e.g. a council search ordered during the conditional period identifies an outstanding approval), this can nullify your protection under title insurance. Some council searches can also be close to the cost of a title insurance policy.

So, is there any benefit to ordering a council approval search or is it best to rely on title insurance?

The answer will depend on several factors:

The value of the property. Policies will generally have a cap on what will be paid out for unapproved structures. The policy may be sufficient to cover a small shed but not sufficient to cover an extension to a house that includes several bedrooms and bathrooms. As such, for high value properties or properties that have undergone major renovations, coverage under title insurance may be insufficient and a buyer should consider ordering a council approval search before deciding if they wish to proceed with the purchase.
Council search timeframes. Some council approval searches take several weeks to come back, by which time your contract may be unconditional. As such, ordering a council approval search during the relevant period may not be feasible.
Your termination rights. You may not have any conditions under which you can validly terminate the contract for discovery of unapproved structures, so ordering a council search may not provide much benefit.
Your risk appetite. Some buyers will be unwilling to proceed with a purchase if they were to discover that a structure is unapproved. Other buyers are willing to take that risk and deal with the consequences post-settlement if necessary.

5. VENDOR DISCLOSURE OBLIGATIONS

Some states, such as New South Wales and Victoria, have vendor-disclosure obligations in relation to council approvals (as opposed to Queensland’s current buyer-beware regime). However, we do note that these obligations are not always complied with. As such, without conducting a search prior to settlement, there is still the potential for unapproved structures to go undetected.

6. CASE STUDY 1 – HIGH VALUE PROPERTY

You are purchasing a high-value property to live in and are aware that there have been several additions to the property, including a number of bedrooms and bathrooms. If these are not approved, you do not want to proceed with the purchase. Before signing the contract, you spoke with your solicitor and included a council approval search special condition in your contract – as such, you have sufficient time to order the relevant search and a termination right if adverse findings are discovered.

Possible outcomes:

You order the search during the conditional period and it comes back showing the additions are not approved. You decide to terminate the contract under the special condition.
You order the search during the conditional period and it comes back showing the additions are approved but a small shed is unapproved. You decide to proceed with the purchase but still take out title insurance. Given your knowledge of the shed, the policy won’t cover you for any future issues associated with the shed, but it will still cover you should any other problems arise (e.g. encroachments).
You do not order the search but instead take out title insurance. Post-settlement, you are approached by council and advised the additions are not approved. You contact your title insurance provider and they discover that the way in which the additions were built make it impossible to get approval now. They must instead be demolished. Whilst the title insurance policy pays out the maximum amount allowed for an unapproved structure, it does not cover the loss in market value caused by the removal of the additions. Had the council search been ordered, this situation could have been avoided.

7. CASE STUDY 2 – RISK THAT MINOR WORKS MAY NOT BE APPROVED

You are purchasing an investment property and are uncertain whether a small patio has council approval. Your contract is only subject to a 7-day building & pest condition. A council approval search will take 10 days.

You decide not to proceed with the council approval search and take out title insurance instead – you are aware that if the structure is not approved and council becomes aware of this, you may need to get it approved or removed, and you do not have any concerns with this.

Post-settlement, council approaches you to advise the patio is not approved. You contact your title insurance provider and they arrange for the patio to be upgraded and approved.

Title insurance can be seen as a risk management tool, particularly where time or information constraints prevent full due diligence. However, we recommend that title insurance be viewed as an additional protection, rather than a replacement for due diligence and all buyers should consider the merits of appropriate searches.

IF YOU HAVE ANY QUERIES REGARDING TITLE INSURANCE, PLEASE DO NOT HESITATE TO CONTACT THE MAP LAWYERS’ TEAM.

***Disclaimer – The above is not intended to be legal advice and the decision to take out title insurance should be considered on a case-by-case basis, and a full review of the product disclosure statement is recommended.