When it comes to real estate there are several different types of insurance policies that are often discussed, and it is important to know the differences:
• Property Insurance
• Personal Property Insurance
• Personal Liability Insurance
• Mortgage Insurance
• Mortgage Life Insurance
• Mortgage Payment Insurance
• Mortgage Disability Insurance
• Title Insurance
• Contract Failure Insurance
• Legal Fee Insurance
• Fraudulent Claims Insurance
Insurance Generally
The contractual agreement between an insurer and an insured is a particularly unique agreement in law. It is based upon the doctrine “uberrimae fides” or the utmost good faith. The essence of the relationship is the obligation upon the insured to provide full, fair and sufficient disclosure to the insurer, in order that the insurer can adequately assess the risks, enter the agreement with full knowledge and charge the appropriate premium.
All too often, an individual with full knowledge of some particular risk fails to disclose the risk to the insurance company. At the time of the claim, the insurance company is able to void the policy. There is no benefit here, to anyone. The individual although making regular payments never was covered by insurance. The reason is clear: wilful concealment of relevant facts. The insurance company has an unsatisfied customer, loses goodwill and may be obligated to return a portion of the premiums paid.
The lesson to be learned is that an insured must make full disclosure at the time of the written application for insurance in order to be sure that there is an enforceable insurance policy in place.
Property Insurance
This is the most basic type of insurance when we are discussing real estate. If there is damage to property, then the owner will be compensated. The damage must be occasioned as a result of one of the specified risks in the policy. These are commonly accidents and are listed as “perils” in the policy. Is flooding included or excluded? Each policy is different. And, each community is different in terms of the types of risks for which insurance is commonly sought. It is easy to obtain flood insurance in Toronto but not in New Orleans.
The policy will usually be quite clear on this point. Flooding is either covered or not covered. There is no mistake about it. But, do you need flood insurance? Are you in an area that is susceptible to flooding? If so, then you better obtain it. Your mortgage company will likely insist upon it. However, if you are in area where there is little risk, then you may be able to upgrade the usual policy to include this added risk. The additional premium might be quite low, because the risk is so remote. If this is the case, then “flooding” will be added as an additional or covered peril under your policy.
Let’s look at an actual example. A few years ago, the Don River overflowed causing flood damage to many homes. This was unexpected. In fact, it was as a result of a 100 year storm. This is the standard that is selected for most communities in terms of the level of protection. Municipalities ensure that there is an adequate infrastructure to withstand damage that may be caused by the largest storm that has occurred in that area over the last 100 years. For southern Ontario, the benchmark is Hurricane Hazel in October 1954.
Now most home owners would simply like to be protected. Those with flood insurance were covered, those with all-perils coverages (that included flood damage) were covered, but those with basic coverage had to prove the source of the water. If the sewers backed up, then that damage was covered as long as the policy said that it wasn’t excluded. And, if the water simply flowed into the house from the overflowing Don River, then it wasn’t covered. The issue here is that insurance policies are complex. The lowest quotation does not always provide you with the coverage you require, and the only time you need insurance is when there is some kind of mishap.
A simple question that can get complicated is “how much is the policy”. You might think that a $ 100,000.00 policy might be quite sufficient. The entire building is only worth $ 200,000.00, so what are the chances of a loss of more than one half of the building? But, you might be surprised to find that there is a co-insurance clause in your policy. This might mean that you agree to insure the building up to 60% of its value, and if you fail to do so, then you will only receive a percentage of your $ 100,000.00 policy, not the entire amount. The preferred solution is to ensure that you obtain “full replacement value” insurance. In this case, the insurer will repair the damage without a monetary limitation. In fact, many mortgagees will require this kind of insurance policy.
Personal Property Insurance
This type of policy provides accidental loss or damage insurance with respect to your personal property, chattels and like moveable objects. It is sometimes referred to as “contents insurance”. There are strict limitations particularly when it comes to jewellery.
Personal Liability Insurance
This type of policy cannot usually be purchased on its own. It is bundled with other policies for either home owners or tenants. If you accidentally or negligently cause a financial loss or damage to another person, the insurer agrees to defend the claim, pay the legal fees and pay the claim, if necessary. There are three notable exceptions, contractual losses, business losses and car accidents. In all three cases, insurance is available but you will have to pay a substantially higher premium, and one which is commensurate with the risk undertaken by the insurer. There will be a specific policy issued for such risks.
Mortgage Insurance
This really isn’t insurance at all. It is a guarantee made by an approved guarantor that you will make your mortgage payments. It is the mortgagee who will insist upon it. It is a requirement of the banks when they provide high-ratio financing. If the mortgage is 75% or less of the total value of the property, then the banks may provide a conventional loan. If the loan exceeds this amount, this is referred to as high-ratio financing. The mortgage is still permitted, but the banks must obtain the guarantee.
Upon default, the guarantor will pay the bank and take an assignment of your debt from the bank. It may then sell the property under the power of sale provisions contained in the mortgage and collect any deficiency from you.
So, it is really a misnomer to call it “insurance”. You never receive any funds at anytime. You are never the beneficiary. At the time of placing the high-ratio first mortgage upon your property there is a one time fee or premium, which is remitted to an approved provider like CMHC.This covers the life of the loan. There is no refund should you pay your mortgage off early.
Mortgage Life Insurance
This is truly life insurance written upon the life of the mortgagee. It is obtained through a life insurer affiliated with the mortgagee. It is a term policy of insurance and is in force only during the currency of the loan. The life insurance will be paid to the mortgagee (as the beneficiary) and reduce the loan to zero. The mortgagee will then provide a discharge of the mortgage. Renewal agreements are not certain. The bank may change to an insurer with more stringent requirements and your insurability may change over the years due to illness or other health conditions. Each financial institution will have an arrangement with an approved insurer. However, it will no longer apply once the mortgagor reaches a certain age (ie. 65, 67 or 70).
For these reasons, it is often preferable for you to obtain your own personal term life insurance policy. The premiums will likely be about the same, you will own the policy, you will deal with one insurer (it’s not a Group policy), your beneficiaries will receive the proceeds (without regard to your debts), it will be automatically renewable should your health deteriorate, and it will provide payment in the full amount of the face value of your policy (no need to see whether you paid off your mortgage last month). While it becomes increasingly more expensive as you age, it will have higher age limits.
This type of insurance is also available to two or more registered owners and may be written on a joint lives basis, or a last survivor basis. The distinction in the case of a husband and wife would be that payment is made upon 1) the death of one of them, or 2) the death of both of them. There is a substantial difference in the premiums. So, you should be absolutely sure which option you have chosen.
Mortgage Payment Insurance
This type of insurance will be payable and attend to the payment of your regular monthly mortgage payments if you are not able to make them. It is commonly called “job loss insurance”. The conditions that you will likely have to satisfy include a minimum period of employment, no prior notice of termination (that is prior to the application), termination or temporary layoff for a certain minimum period, termination for cause may be excluded, and the limitation of entitlement to payments for a specified period of time. Typically, you must be “off work” for two months before you qualify and payments will start on the third month and continue while you are unemployed for a period not to exceed two years. Given the restrictions, and the limited payout period, you might not be surprised that this type of insurance is not particularly popular.
Mortgage Disability Insurance
This type of insurance will attend to payment of your mortgage payments throughout your period of disability until the mortgage is paid off or you reach a certain age (frequently 65 years) or the usual age of retirement. With some policies the benefits may be transportable. You could move and take your mortgage with you. In other cases, you may be locked into one mortgage and one location. You will have to investigate the details should this type of insurance be of interest to you. Group disability policies are often cheaper than individual plans, so if your mortgagee has this option available, it may be well worth consideration.
Title Insurance
Within the last two decades title insurance has been introduced to the Ontario market. It is available to consumers through a solicitor’s office at the time of the purchase or mortgage of real property. The insurer assumes some of the risks that would ordinarily be borne solely by the purchaser. There is a one-time premium which seems reasonable in the circumstances. There are several title companies and the policies issued vary somewhat in their terms.
Let’s consider an example. Frequently, there is no “up-to-date” survey of the property. The risk of the newly installed swimming pool being too close to the lot line is a risk that the purchaser will have to assume. It will not be covered in the solicitor’s opinion on title. In fact, it will be specifically excluded.
The first choice is to obtain a new survey. If it complies with the setback requirements of the municipality, then there is no problem. If it is too close, then the vendor will have to obtain the consent of the local Committee of Adjustment. But, there might be another potential solution. For less than the cost of a new survey, a title insurer will agree to assume the risk. If at some time in the future it is demonstrated that the swimming pool is too close, the title insurer will arrange for a solicitor to obtain the consent from the Committee of Adjustment at their expense, failing which they may have to hire a contractor to move the pool.
Once the policy is issued, it will protect you against a variety of risks including subsequent mortgage or title fraud. If the policy is issued at the request of the mortgagee you will have to make sure that the policy covers you as a named beneficiary. You’re paying for the policy, so for a slightly additional premium your interests should be covered as well.
In the swimming pool example, if you were not named as an insured, your mortgagee might simply not care. They may say that the pool is not important to their overall security. That being the case, you would be on your own to resolve the problem.
There are many other examples of title difficulties but the most important ones lie in the realm of access to rural, recreational or cottage properties. In these cases, title insurance is very worthwhile.
Contract Failure Insurance
Insurance is also available to insure to performance of contracts on a timely basis. If you were to enter an agreement that provided you were to close your purchase on the 31st of March and your sale on the same day, you might want to consider this form of insurance.
Let’s assume that your purchaser does not have sufficient funds to close on the date arranged. You need this money to pay off your old mortgage, pay the amount due on closing, pay the movers, and so on. Otherwise, you are in default and liable for damages sustained by your vendor.
You can solve this problem in one of two ways. You can arrange for sufficient funds from your bank by way of bridge financing and later sue your defaulting purchaser for your financial losses or you can simply insure the contract. The insurer will compensate you for your losses immediately so that you will not have to litigate. This type of insurance is reasonably inexpensive.
Legal Fee Insurance
This is not really insurance, unless it is a benefit provided pursuant to an actual policy of insurance. For example, if you purchase a motor vehicle accident policy one of the benefits will be the defence of any lawsuits against you. The insurer will have the right to retain the lawyers and settle the case on their terms. So, in this case your legal fees are paid by insurance.
Most arrangements dealing with other types of legal matters are benefits provided by group policies, employee benefits or pre-paid arrangements. Strictly speaking, it’s not insurance.
Often, you will be entitled to contact a law firm by telephone and ask questions. Sometimes there will be a limited amount of services provided, perhaps a Will and powers of attorney. This is where the real benefit lies: routine telephone consultations and specified services. Although most participating law firms will provide a discount off the regular fees charged to other clients for non-scheduled services, you would be wise to shop around. You will probably find that the same services are available from other firms at the same price or even lower prices. Alternatively, you may find that another law firm is much more experienced in the field in which you require representation.
Fraudulent Claims Insurance
This type of insurance is usually an extension of title insurance. It applies after you have acquired the property and have become the subject of title or mortgage fraud.
In addition, due to the rise in identity theft, some insurance companies are providing coverage to compensate you for losses in limited circumstances.
Risk Management
This entire discussion of insurance really brings us to the larger issue and that is: risk management. There are, of course, a variety of ways to reduce your exposure to unnecessary risks, and you don’t always have to buy an insurance policy.
Your first, and probably wisest decision is to reduce or eliminate the risk. If the risk is still material, then you should consider obtaining insurance. The important issue here is to ensure that the premium is fair and appropriate. Otherwise, you should go back to the original issue and consider more costly alternatives to eliminate or reduce the risk.
Let’s consider a case in point. New Orleans had Category 3 storm walls to hold back the Gulf of Mexico. Hurricane Katrina was a 100 year Category 5 storm and demolished the seawalls causing the City to flood. Many insurance companies refused to underwrite this risk. It was a predictable accident just waiting to happen. Of course, you could obtain fire insurance, and even termite insurance, but what you really needed was flood insurance and that was not available. Ultimately, the loss fell to the Federal Government which assumed both the cost of rebuilding the City and constructing a Category 5 seawall. A correct analysis of the issues from a risk management perspective would have led to the conclusion that the Federal Government ought to construct a proper Category 5 seawall before the storm.
When it comes to “storms” in your life, you might consider the following risk management strategies:
• Have a proper estate plan
• Have a proper financial plan
• Organize your affairs to pay the minimum amount of taxes
• Sign a Will, power of attorney for property and power of attorney for personal care
• Incorporate a personal holding company
• Set up a family trust
• Secure appropriate life and disability insurance
• Place title to assets with others
• Creditor-proof your assets
And, if you are buying real property, don’t forget to “ensure” the following:
• Check the title before you submit an offer
• Examine the Certificate of Status or the SPIS (Seller Property Information Statement)
• Have a qualified home inspector attend and provide a written report
• Obtain a new survey
• Determine the appropriate zoning (before the offer is submitted)
• Complete an environmental soil and related hazards inspection
• Arrange for the transfer of existing warranties on any relevant products or building materials
• Limit the exposure of the property to creditors by employing a series of creditor protection strategies
The next step, where the risks are clear and identifiable and the premiums fair and reasonable, make arrangements to “insure” the following:
• The building
• The contents
• Your associated personal liabilities
• The title
• Mortgage payments in the event of disability, if disability insurance is not otherwise available
And, finally, where there may not be other reasonable alternatives, consider obtaining:
• Mortgage Insurance for high-ratio loans
• Mortgage Life Insurance, if another term life policy is not available
• Contract Failure Insurance
• Legal Fees Insurance
Brian Madigan LL.B., Broker,