05 September 2022
Certificate of Title Top Up Insurance
Developed jointly by the Law Society and the Council of Mortgage Lenders (now UK Finance), the Certificate of Title ensures the reliability of statements concerning properties.
During a property acquisition, re-financing or development, purchasers and lenders rely on a certificate of title (CoT) to ensure that all matters relating to the property are acceptable and that there is “a good and marketable” title.
The approved CoT is the document the conveyancing solicitor gives to the lender to confirm certain statements about the property. Developed jointly by the Law Society and the Council of Mortgage Lenders (now UK Finance), the CoT aims to reduce the risk of a conflict of interest when a solicitor acts for both the lender and the borrower.
Generally, the solicitor producing this will be liable for any mistakes, errors or omissions. In the event that this happens, the landowner would seek to recoup damages and any financial losses from the law firm. This loss would be claimed under the solicitor’s professional indemnity (PI) insurance.
During a large transaction, at times, the solicitor preparing the CoT seeks to limit their liability. This is because they would need to secure additional PI insurance, and the cost of this has increased significantly over the last few years. The additional insurance premium costs can be prohibitive to the transaction. Therefore, the lender can either accept the limit of liability or pay a considerable premium to top up the level of PI cover.
Lenders can request the full limit of liability, but the premium payment would be the borrower’s responsibility and can add substantial cost to the transaction. In accepting the limit of liability cap, there is a risk that an issue could cause a significant loss, as title ownership is generally binary.
The CoT aims to reduce the risk of a conflict of interest
The CoT confirms to the lender:
• There are no legal problems with the property – so the lender can safely lend against it
• Who will own the property once the sale is completed
• The completion date when the funds are needed
If there is an error in the CoT (for example, it states that the seller or borrower owns the title and it transpires that they do not or that there are no restrictions on the title and there are), the loss could be the whole value of the property. In the event that a property is worth £500 million and the solicitor who produced the defective CoT has a liability cap of £200 million, there would be a loss of £300 million that would not be recoverable. Therefore parties have been keen to purchase cover to protect against this potential shortfall.
Most of the statements and issues covered by a CoT fall within the risk appetite of the title insurance market, and insurers have started to provide “top up” cover to these CoTs up to the full value. The risk from an insurer perspective is good as there is usually a large buffer or excess where the solicitor has their level of PI in place, keeping premiums low in comparison to PI.
These policies, while new, are becoming wider in terms of coverage, and insurers are looking to broaden their offering to cover almost all of the statements. The amount of cover Gallagher can procure is significant, and in the hundreds of millions to a billion pounds. Though the market for this type of cover is embryonic, insurer appetite for this type of policy is growing.
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.