OCA rules title insurance exception did not apply

The Court of Appeal has found that an exclusion barring a victim of a mortgage fraud from collecting insurance coverage did not apply when the funds in the transaction were transferred through lawyers’ trust accounts.

OCA rules title insurance exception did not apply
Camille Dunbar says that when contracts around title insurance are ambiguous, courts have to go down a certain interpretive path.

The Court of Appeal has found that an exclusion barring a victim of a mortgage fraud from collecting insurance coverage did not apply when the funds in the transaction were transferred through lawyers’ trust accounts.  

In Nodel v. Stewart Title Guaranty Company, insurer Stewart Title refused to pay Karl Nodel, a private mortgage lender, for a loss he suffered from a mortgage fraud. The insurance company cited an exception in Nodel’s policy that applies if mortgage proceeds are paid to anyone other than the registered titleholder. As the funds went through Nodel’s lawyer’s trust account and that of the borrower’s lawyer, Stewart Title argued that the exception had been triggered.  

Nodel brought civil action against both Stewart Title and his lawyer, Isaac Singer, in the transaction, which was settled. Singer then commenced a third-party claim against Stewart Title, taking an assignment of Nodel’s rights under the policy, including his claim against Stewart. 

An application judge found exception did not apply and that Nodel was covered, as the registered titleholder was paid when the borrower’s lawyer received the funds in trust. 

The Court of Appeal agreed in a 2-1 decision, finding that, in law, Nodel’s payment was to the borrower. The court rejected an argument that trust payments to lawyers do not provide a “commercially reasonable mode of paying mortgage advances given the risks of mortgage fraud.” 

Lawyers say the Court of Appeal’s decision solidifies the ongoing role of lawyers in real estate transactions in Ontario. Gavin Tighe, one of the lawyers representing Nodel and Singer in the application, says that, if the decision had gone the other way, it would significantly diminish lawyers’ roles in private lending transactions as it would remove the borrower’s lawyer from the financial aspect of the transaction.

“Given the number of lawyers who practise real estate, they might be concerned about that,” says Tighe, a partner with Gardiner Roberts LLP.

He says it could have also meant that lawyers who represent lenders in fraudulent mortgage transactions could end up being liable to their clients. 

“If the title insurer successfully denies the coverage, the lawyer for the lender is the one holding the bag in terms of the liability to the lender,” he says. 

The exception in the policy at issue held that if the proceeds of the insured mortgage are “paid to any person or entity” other than the registered titleholder, then Stewart could deny coverage.   

Stewart Title argued that the policy required that the mortgage proceeds be paid directly to the registered titleholder, but that in this instance that did not happen, as the money was paid to the borrower’s lawyer. 

LawPRO, which was involved because of the action against Singer, argued that the words “are paid to” should not be confined to a direct payment to the titleholder and that it allowed for many methods of payment, including to the borrower’s trustee.   

The majority decision at the Court of Appeal found that the exception clause is ambiguous and that the term “are paid to” should not be interpreted to exclude the conventional way of paying mortgage proceeds. The Court of Appeal noted that payment of mortgage money to a borrower’s lawyer in trust is routine practice that would not be reasonably expected to disqualify mortgage fraud insurance. 

“Moreover, disqualifying coverage where payment is made to the borrower’s lawyer in trust would not produce a reasonable commercial result,” wrote Justice David Paciocco on behalf of the majority of the three-judge panel. 

“As the application judge pointed out, if the borrower has counsel, the lender’s lawyer cannot deal directly with the borrower and must deal with the lawyer.”  

The lone dissenting judge, Justice Ian Nordheimer, said that the language of the clause was unambiguous and applied to the situation. As the money was not paid to the registered titleholder, they were not paid in accordance with the policy and Stewart was entitled to deny coverage, he said.

Camille Dunbar, a lawyer with Koskie Minsky LLP, who was not involved in the decision, says the analysis of the majority’s decision was sound, but lower courts might latch on to Nordheimer’s strong dissent.

“Even though the majority of the Court of Appeal has ruled that this exception is to be interpreted a certain way, I think it really does open up the door for insurers to continue to make the same argument,” she says. 

Dunbar says the words “paid to” are truly ambiguous and that Stewart Title probably intended for the language of the exception to say that the funds have to be “received” by the borrower.

“The problem here is the language that they used. I know what they intended and what they meant to say, but because what they’re meaning to say and what’s actually on paper can be interpreted [in] different ways, the court finds there was an ambiguity,” she says. 

Peter Griffin, one of the lawyers representing the insurance company, declined to comment on the decision and said he was not in a position to discuss whether his client expects to seek leave from the Supreme Court of Canada to appeal the ruling. Tighe says the decision will have substantial implications for a great number of current claims where title insurers have attempted to rely on this exception.

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