Recasting Title Coverage

MacDonald v. Chicago Title Insurance Company of Canada, 2015, released in early December by the Court of Appeal for Ontario, may impact claims management under existing title policies and will, most certainly, lead to the recasting of policy language by most, if not all, major Canadian title insurers.

Like so many such cases, the claim of the insured in MacDonald was of relatively little monetary value, but the resulting judgment may be very costly industry-wide, providing a reminder that claims management must always have one eye open to not creating new prejudicial legal precedent.

Briefly, the MacDonalds purchased a home and obtained a standard owner’s title insurance policy from Chicago Title. Some time later, in anticipation of renovations, they discovered that the seller had done substantial renovations to the main floor, including removal of load-bearing walls, without the required municipal building permits. A municipal notice was issued to the MacDonalds requiring that temporary remedial work be done. Incurring approximately $75,000 in costs, they made a claim under their title policy to Chicago Title, but it was denied.

The title policy contained two coverage provisions of particular importance to this discussion:

16. You are forced to remove your existing structure – other than a boundary wall or fence – because any portion of it was built without obtaining a building permit from the proper government office or agency; and

11. Your title is unmarketable, which allows another person to refuse to perform a contract to purchase, to lease or to make a mortgage loan.

At the trial level, Ontario’s Superior Court of Justice accepted Chicago Title’s assertion that Section 16 (non-permit coverage) of the policy was inapplicable to the facts because, although the underlying cause of the issue was that a portion of the building was built without obtaining a permit, the MacDonalds had not been forced to remove their existing structure.

Technically, the insurer’s position was correct, but standing back from the technical argument (and with the benefit of hindsight), arguably it was a position that was inconsistent with the spirit and intention of Section 16.

Some Canadian title insurers have slightly broader policy language dealing with such non-permitted work, that provides coverage where the insured has been forced to remove or remedy the existing structure, recognizing that the nature of the forced remedial action is less important than the root cause of the defect (the lack of building permit).

On appeal, the MacDonalds reiterated their position that coverage should be allowed on a number of fronts, including pursuant to Sections 11 and 16 of the policy.

The Court of Appeal determined that Section 11 (unmarketability coverage) was the only coverage provision that needed to be considered.

The court decided the lower court had adopted “an unduly restrictive interpretation of the coverage provisions in the Title Policy” and reiterated that the following principles of interpretation for insurance contracts are “well-settled in Canadian Law”:

(a) the Court must search for an interpretation from the whole of the contract and any relevant surrounding circumstances that promotes the true intent and reasonable expectations of the parties at the time of the entry into the contract;

(b) where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected;

(c) ambiguities will be construed against the insurer having regard to the reasonable expectations of the parties;

(d) an interpretation that will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided;

(e) coverage provisions are to be construed broadly, while exclusion clauses are to be construed narrowly;

(f) the contract of insurance should be interpreted to promote a reasonable commercial result; and

(g) a clause should not be given effect if to do so would nullify the coverage provided by the policy.

The court then directed its attention to the policy’s title marketability coverage provision and determined that the insured’s title was unmarketable, and that the cause of the deficiency was that the prior owner had done work without a building permit.

IMPACT OF DECISION

While the economic result of the decision is not surprising, the use by the court of the marketability coverage in Section 11 (and not the no-permit coverage in Section 16) to award coverage is problematic for Canadian title insurers, generally.

Despite their common name, title insurance policies insure against more than just title issues. They have evolved into policies that insure over a number of transactional and property-related risks that do not necessarily relate to the owner’s legal title to the property.

In the course of that evolution, specific coverage provisions have been included in the standard form policies, sometimes consistently across the industry and sometimes not. But to the extent that title policies have reached beyond the scope of title-proper, they have, as a general matter, been cautiously drafted so as to clearly circumscribe the scope of coverage. The no-permit coverage provision in Section 16 is a fair example of this.

Accordingly, one might reasonably speculate that the Court of Appeal, being bound by facts that did not fit within Section 16 squarely, and, perhaps, influenced by an overall view that the equities were in favour of the insured, forced a round peg into a square hole by expanding the interpretation of the “unmarketability of title” concept.

While the possible implications of the case have yet to be seen, it is reasonable to suggest the following are the most immediate concerns facing Canadian title insurers:

(a) “unmarketability of title” is generally understood to mean there is a defect in the title to the property that inhibits the owner’s ability to sell, lease or refinance it. There is a difference between the unmarketability of title and the unmarketability of property, the latter being more often associated with ancillary building or land defects (work orders, zoning compliance, deficiency notices and the like). The court’s decision has effectively blended the two concepts. A door has been opened through which unexpected claims may be brought, including claims for outstanding work orders, latent defects and negligently granted building permits, so long as by analogy they can be said to affect the marketability of title in the same manner as the absence of a building permit;

(b) title insurers who believe they have ring-fenced coverage for non-title issues are exposed to the risk that their policy language is not sufficient. In this case, the court was faced with a claim that was in the wheelhouse of the intentions of Section 16, and being frustrated on the facts, the court shoehorned it into Section 11 as though it were a basket coverage clause; and

(c) the insured received an award for the recovery of fairly modest costs associated with the remedial of a defect that, but for one word (“remove”) in the no-permit policy coverage, was otherwise within the spirit of the provision. However, now that there is an appeal court decision confirming that lack of a building permit (and analogous non-title defects) may be covered by the breadth of Section 11, commercial title policies (which customarily do not generally cover non-title issues such as zoning, permits and off-title search enquiries) are potentially in question. If the comparable coverage in commercial policies is challenged for similar issues, the unintended exposure to Canadian title insurers could be significant.

NEXT STEPS

What to do? For now, title insurers should be reviewing their existing claims with this case in mind, and should be revisiting their standard form title policies, both residential and commercial.

The contractual fixes are not difficult to implement, although given the ongoing challenge that title insurers have of educating the real estate legal community on title insurance and how it works, any policy changes will have to be well-drafted, communicated and marketed.

Those with the editing pen in their hands would be wise to keep as their mantra the seven “well-settled” principles in Canadian law of the interpretation of insurance policies – the aforementioned items (a) to (g) – keeping in mind that title insurance is a relatively new product in Canada, and that there is very little jurisprudence in Canada on title insurance policy interpretation.

Things that title insurers may want to consider when revisiting their title policies include the following:

(a) Be clear and specific as to what constitutes title and what does not. The more that title policies cover risks other than title without clear dividing lines, the more they risk an expansive interpretation of coverage and that everything in the policy is blended as title.

(b) In MacDonald, the Court of Appeal found no direct exclusions that would rebut the marketability of title coverage. Knowing that the court has a predisposition towards reading policy exclusions restrictively, they should be clear and precise. It would seem that many title policies in existence today have been drafted on the misapprehension that because a risk has been insured in one provision, a court will not find that it is also (even if redundantly or more broadly) insured in an unrelated provision.

With the benefit of hindsight, there is a litigation lesson in this case for all insurers when assessing the impact of claim defence or settlement: beware of creating unintended precedent.

MacDonald is still being digested by the legal and insurance communities. The challenge is that leave to appeal to the Supreme Court of Canada on an issue such as this may be difficult to obtain for Chicago Title.

Should that effort be initiated and fail, then this decision will pose a threat to title insurers until such time, if any, as another test case can be brought forward in which MacDonald can be distinguished on these issues as being either wrong at law or unique to its facts and not useful for general legal application.