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Ontario appeal court distinguishes Sattva ruling

Title insurer must pay to rectify ‘unsafe’ building due to illegal renovation
|Written By Jim Middlemiss

A homeowner who was issued an order by the city to remedy an unsafe building, because a previous owner had illegally removed a support wall, can tap his title insurance policy to cover the repairs, the Ontario Court of Appeal has ruled.

Gavin Tighe and Alexander Melfi represented the homeowners in their fight over title insurance coverage.Photo: Robin Kuniski

While the decision in MacDonald v. Chicago Title Insurance Company of Canada will no doubt delight the real estate bar, the case is probably going to have a bigger impact for litigators because of the court’s finding that standard-form contracts are subject to the less stringent standard of appellate review known as correctness, rather than an overriding palpable error. The ruling is one of those “rare” cases that can be distinguished from the Supreme Court of Canada ruling on contractual interpretation in Sattva Capital Corp. v. Creston Moly Corp.

Gardiner Roberts LLP litigator Gavin Tighe, who along with Alexander Melfi represented the homeowners in their appeal of a lower court ruling, says the Sattva portion of the ruling is “hugely important” to litigators. “I think what we are seeing is the law taking into account that general blanket rules never work and you have to look at the particular case on its own particular merits.”

Especially when it comes to pre-printed standard contracts, it “really doesn’t make sense to apply that sort of blanket deferential analysis,” he says.

“Title insurance is probably at this point in time one of the most widely distributed insurance policies in the country,” Tighe says, noting that almost every home purchaser obtains both title and fire insurance coverage.

However, he says, the scope of what title insurance actually covers remains a bit of a mystery, since there is a lack of case law on the topic in Canada, given that the product is still relatively new to the marketplace.

“I think there’s been a major gap in the law on title insurance, given the incredibly widespread use.”

This case, he says, casts light over that shadow.

Real estate lawyer Bob Aaron adds that the case is a “big win for homeowners.” He says it means that if “there was illegal work done in the house that didn’t comply with the building code, the title insurance policy would cover a post-closing work order from the city.”

Aaron says the MacDonald ruling “changes a lot of litigation in progress. There might be a lot of settlements coming up pretty quickly.”

Real estate lawyer Michael Carlson adds that title insurers have narrowly interpreted their policies when it comes to marketable title and limiting coverage to instances where homeowners are forced by a government authority to remove or remedy a structure under s. 8 of the Ontario Building Code Act, which specifically deals with permitting requirements, as opposed to a s. 15(4) order, which deals with a finding that a building is unsafe. “This position has been taken time and time again by these companies and my reading of MacDonald is that this argument will no longer carry any weight with the court.”

The MacDonalds bought a Toronto, multi-storey home in 2006. In 2013, they learned that a load-bearing wall had been removed during renovation work undertaken by the previous owner without a building permit. That made the second floor unsafe.

The city issued a remediation order, requiring the couple to temporarily support the floor and they claimed under their title policy.

The couple brought a summary judgment motion, but the lower court judge ruled that their title policy did not cover the situation and held their title was unaffected by the unpermitted construction because the house still remained marketable, albeit not worth what it was before the defect was discovered. The judge noted that the city work order was not registered on title, and he granted summary judgment in favour of Chicago Title.

On appeal, however, Justice C. William Hourigan disagreed with the motion judge’s interpretation of the contract. Hourigan said the judge acted on his “own volition” when he held that for a municipal work order to affect an owner’s interest in his or her property it must be registered on title.

Hourigan wrote that’s not how the process works and the finding was “not supported by any evidence.”

Rather, he wrote, “they are a defect that can only be discovered by what are commonly known as ‘off-title searches.’”

LAWPRO, which intervened in the case, provided evidence involving a 2005 agreement between it and the major title insurers, where the real estate transaction levy would be waived in exchange for title insurers releasing Ontario lawyers for any claims arising under a policy and indemnifying lawyers against any settlements or judgments involving title-insured transactions.

LAWPRO’s affidavit stated it understood the definition of title meant more than claims and impediments registered against title but included defects that could only be discovered through off-title searches.

LAWPRO argued that if the lower court ruling wasn’t overturned, then its agreement with title insurers would not cover claims that arose off-title and LAWPRO would bear the responsibility even though it waived the transaction levy.

Hourigan agreed, noting that “the restrictive scope of title insurance contemplated by the motion judge would cause chaos in the real estate bar as, no doubt, purchasers of title insurance throughout the province have instructed their solicitors not to conduct the off-title searches on the understanding that such defects were covered by their title insurance.”

The result, he said, was an “unduly restrictive” interpretation of the coverage, and that amounted to an error of law.

Hourigan cited the section of the policy dealing with unmarketable title and disagreed with the motion judge’s finding that the homeowners’ title was not affected, because they could still sell their house.

“The fact that someone might be willing to purchase a dangerously defective building does not mean that it is marketable under the title policy.”

He noted that the marketability provision needed to be construed broadly under insurance contract interpretation principles.  

Hourigan said the danger flowed directly from the previous owner’s failure to obtain the necessary municipal approval for the changes, and that failure made the property unmarketable within the definition of the title policy.

He awarded the couple their costs for the appeal and the earlier motion application.

When reached, Robert Dowhan, counsel for Chicago Title, had yet to discuss the case with his client and declined to comment.

In addressing the scope of appellate review of a lower court ruling involving a contract, Hourigan noted that the Sattva case has been the topic of much discussion among legal commentators.

In distinguishing the situation from Sattva, which dealt with an arbitration award and review, Hourigan noted that “standard-form contracts are often highly specialized contracts that are sold widely to customers without negotiation of terms” and applies equally to everyone who buys one. Such a policy, he wrote, “is of general importance and has precedential value in a way that the interpretation of other contracts may not.

“The rationales in Sattva that support adopting a deferential standard of review do not apply to contracts of this type, as the factual matrix does not meaningfully assist in interpreting them and their construction has broad application,” Hourigan wrote. So the “correctness standard of review” applies to ensure that “appellate courts are able to fulfill their responsibility of ensuring consistency in the law.


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