Title insurance policies that exclude coverage where mortgage proceeds are paid to parties other than the registered title holder, cannot exclude coverage if payment is made to counsel to the registered title holder, unless there is clear language to the contrary

Insurance law – Title insurance – Exclusion clauses – Policies and insurance contracts – Coverage – Interpretation of policy – Insurer – Rights, duties and liabilities – Actions

Nodel v. Stewart Title Guaranty Co., [2017] O.J. No. 649, 2017 ONSC 890, Ontario Superior Court of Justice, February 8, 2017, W.M. Matheson J.

This action arose from a coverage dispute. The insured applicant obtained a title insurance policy from the respondent insurer for its use, as a private lender, in a private mortgage. The insured subsequently learned that the mortgage was fraudulent and sought coverage.

The insurer admitted that fraud was covered by the policy, but denied coverage on the basis of an exclusion clause. This clause precluded coverage where: “the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder… then the Company can deny coverage and shall have no liability to the Insured for any matters that involve the allegation of mortgage/title fraud.”

The insurer argued that the exclusion clause was applicable because the insured proceeds were paid to counsel for the registered title holder, in trust, rather than to the title holder directly. It argued this brought the transaction within the scope of the exclusion clause.

In support of its position, the insurer relied on its application form, and in particular, the following question: “Are the mortgage proceeds being paid to anyone OTHER than an existing lender or borrower directly?” The insured’s counsel had answered “no” when he obtained coverage for the transaction. The insurer said that this question should have been answered “yes”. It relied on a 2006 bulletin that it distributed to its appointed counsel (including the insured’s lawyer), which indicated that this question was to be answered “Yes” whenever mortgage funds were to be paid to a lawyer in trust. Based on the foregoing, the insurer argued that the exclusion clause applied and the loss was uninsured.

The Court did not agree. It found that the exclusion clause did not state that the payment be made “directly” to the registered title holder. Justice Matheson explained at paragraphs 51 and 52:

[51]  The phrase at issue is the phrase “are paid to any person or entity other than… the registered title holder”. Stewart Title submits that the monies “are paid to” the registered title holder if the cheque is made out to them or wired to their bank account directly. In other words, I am asked to interpret “are paid to” as meaning “made payable to” or “paid directly to” the registered title holder/borrower.

[52]  Essentially, Stewart Title is attempting to limit the different ways a payment can be made, allowing some but not others. … I do not find that the exception clearly and unambiguously bears Stewart Title’s proposed meaning.

With respect to the 2006 bulletin, the Court noted that it used different language from the policy, notably the word “directly”. Further, the 2006 bulletin was applicable to refinancing agreements, which the impugned transaction was not. The Court also considered subsequent bulletins put forward by the insured, all of which made reference to funds being provided to counsel. None of these bulletins suggest that payments to counsel would void coverage.

Justice Matheson concluded that the exclusion was not applicable. The Court found that the insurer was required to fulfill its obligations under the policy.

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