Source: https://lawoftheland.blogs.com/law_of_the_land_canadian_/title_insurance/
Timestamp: 2019-04-26 12:06:49+00:00

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A recently reported case Hanis v. Teevan, 92 O.R. (3rd) 594 is an October 2008 Court of Appeal decision that examined the "duty to defend" obligations under two general liability insurance policies.
Dr. Hanis was hired in 1972 by the University of Western Ontario, fired in 1986 and charged with a criminal offence in 1987. He sued Western and most of the Hanis claims, such as the one on which Hanis obtained judgment, wrongful dismissal, were not covered by the insurance policies. Hanis alleged conflict of interest, infringment of copyright interests, unfair treatment as an employee, wrongful dismissal, misappropriation of property, interference with ongoing contractual relationships and malicious prosecution. Hanis lost on all claims but the one for wrongful dismissal.
After the trial, the insurer argued that the only matter for which it was obliged to bear costs was malicious prosecution and felt that a fair allocation of the cost was 80% to Western and 20% to the insurer. The trial judge held that the factual foundation underlying the claims was the same and it was impractical, artificial and next to impossible to allocate, with any precision, the legal expenses incurred with respect to what the insurer had called “covered, mixed and uncovered” claims. The lower court judge found that only a small portion of the defense clause related exclusively to uncovered claims and allocated 95% of the defense costs to the insurer.
The Court of Appeal held that the allocation of defense costs is not about a question of fairness or equity but rather of what an insurer agreed to do in its insurance policy. The insurance policy in question obliged the insurer to defend in the name and on behalf of the insured, any civil action that may be brought against the insured on account of and had a list that included malicious prosecution. Once the obligation to defend existed, the fact that there was no express language in the policy that qualified that obligation or suggested it did not apply to “mixed claims” mean that the insurer was responsible for all costs, except for those entirely unrelated to the claim it was obliged to defend. That resulted in the extreme allocation of 95% to the insurer and 5% to the insured while most of the trial focused on other matters.
When I think of the case in the context of title insurance policies, it becomes clear that a title insurer’s duty to defend adds a very significant advantage when title insurance coverage is purchased by a home purchaser or lender.
“The Company will also pay the costs, legal fees and expenses incurred in defence of the title, as insured, but only to the extent provided in the Conditions and Stipulations”.
While the Conditions and Stipulations provide that the insurer controls the action, can settle claims and can pay the total amount outstanding on the policy or the diminuation in value of the property to limit its litigation costs, they do not include provisions for any allocation of costs. The coverage provided in the policy and normally acquired endorsements is so broad-reaching that there is very little affecting title or use of the property that the duty to defend would not extend to.
Since there is no provision in a title insurance policy for the allocation of costs on “mixed claims”, the Court of Appeal in the Hanis case will govern and a title insurer will pay the cost of defending almost any claim affecting the property. The obligation of the insured to contribute to that expense will be minimal.
Real Estate Title Fraud - Title Insurance is Still the Answer!
“An easy answer (when purchasing a new home) is to title insure your property, as most title insurance policies cover certain events that occur after the date of the policy. These include fraud and forgery, matters that are obviously not protected by the lawyer’s usual title opinion effective as of closing. In addition, a title insurance policy, as an indemnity insurance policy, includes a duty to defend your title – to deal with the litigation related to such fraud.
Since those words were written there have been two significant changes to the law in Ontario in this area. The first was the enactment by the Province of Ontario of Bill 152, the Ministry of Government Services Consumer Protection and Service Moderation Act, 2006, introduced on October 19, 2006 and which became law on December 20, 2006 (“Bill 152”), which amended the sections of the Land Titles Act (the “Act”) considered in those 6 decisions. The second was the decision of the Ontario Court of Appeal in Lawrence v Wright  O.J. No. 381 (“Lawrence”) in which the court reversed the position previously taken by Ontario courts in respect of title fraud.
Not surprisingly, a few weeks ago I got an e-mail from a gentleman who read my August 2006 article on Lang Michener LLP’s web site saying “What is your opinion on title insurance now that the government has passed Bill 152?”. An excellent question and he could also have added “and now that the Ontario Court of Appeal decided differently than you thought it would?” I thought it was important to look at the changes and see whether I should change my advice. Certainly the law is very different than it was in August of 2006.
When the Lawrence case is discussed below the critical legal question is: When someone receives a conveyance of land under the Land Titles system in Ontario does the Act impose a model of “immediate indefeasibility”, “deferred indefeasibility” or “nemo dat”? Immediate indefeasibility means that, as a purchaser, once the transfer to you is certified you have good title and it is not subject to challenge except where you were aware that good title wasn’t or couldn’t be conveyed. Deferred indefeasibility meant that once the transfer to you is certified you have the ability to convey good title but you might not have good title yourself, depending on the circumstances. If the model was “nemo dat”, then if the conveyance is made to you by someone who did not have the right to convey the property to you, your title is void, even though you had no knowledge of the fraud. The transferor cannot convey what it did not own.
While the nemo dat model was argued by the innocent party’s lawyers in the Lawrence case, it was not accepted and it is not a principle that fits within the concept of the Ontario Land Titles system - that one can rely on the title set out in the parcel register. A nemo dat approach would require lawyers to search behind the title of the owner just as we do under the Registry Act system to ensure that the owner had in fact acquired proper title. That would inevitably bring chaos to the Land Titles system and reverse the strong move of our province in recent years to have most of Ontario properties registered under it.
The difficulty for the courts in determining whether we had a deferred indefeasibility or an immediate indefeasibility model was the contrast between the words in two parts of the Act (before it was amended) - subsection 78(4) and Section 155.
“When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register”.
The courts had difficulty reconciling the two provisions. Subsection 78(4) said that the fraudulent transfer is valid and enforceable once registered, while Section 155 said that a fraudulent and void transfer is still fraudulent and void despite registration. The cases that arose prior to Lawrence seem to have leaned on the words “Subject to the provisions of this Act” at the beginning of Section 155 which suggest that, in case of conflict, subsection 78(4) is paramount. That led to the courts accepting a model of immediate indefeasibility except in those circumstances where the fraudulent person himself was benefiting from title. An “innocent” purchaser or lender in a fraudulent transaction would get title free and clear, but a “fraudulent” purchaser or lender would be deprived of title.
Since the financial institutions that advanced mortgages were generally innocent, that produced results where the true owners of real property would end up with their true title subject to a valid charge. That was the case in: (1) Durrani v. Augier (2000) 5 O.R. 3rd 35; (2) The Toronto-Dominion Bank v. Jiang (2003) 9 R.P.R. 4th 114; (3) R.A. & J. Family Investment Corporation v. Orzech (1999) 44 O.R. 3rd 385; and (4) in Household Realty Corp. v. Liu (2005) OJ No. 5001 (“Household Realty”). It was also the answer in the lower court in Lawrence v Wright  O.J. No. 2907. The approach was starting to change with two lower court decisions in the fall of last year which I will mention below.
Bill 152 solved that problem by making amendments to Section 78 to make it clear that Subsection 78(4) does not mean immediate indefeasibility in cases of fraudulent conveyances, but the deferred indefeasibility model is what operates in fraudulent circumstances. Bill 152 amends both Section 78 and Section 155 of the Act and adds new definitions.
(4.1) Subsection (4) does not apply to a fraudulent instrument that is registered on or after October 19, 2006.
(4.2) Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.
155. Subject to this Act, a fraudulent instrument that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.
Section 155 has two changes: 1) it uses the defined term “fraudulent instrument” so it incorporates the specific definitions set out above and; 2) it drops the words “with respect to registered dispositions for valuable consideration” so whether or not there is valuable consideration a fraudulent instrument is fraudulent and void. Otherwise Section 155 remains the same.
The key changes are to Section 78 where subsection 4.1 just exempts the fraudulent instruments registered on or after October 29, 2006 from either doctrine of indefeasibility. Bill 152 goes on and provides for the deferred indefeasibility model by saying in subsection 4.2 that subsection 4.1 does not invalidate instruments that are not fraudulent instruments registered subsequent to a fraudulent instrument. Accordingly, now under the Act the doctrine of deferred indefeasibility applies in connection with fraudulent instruments. That reverses the position taken in all of the cases cited above and means that the initial transfer or charge is invalid, regardless of whether the transferee or lender participated in the fraud or was “innocent”. However a subsequent transfer to an innocent purchaser or chargee would be indefeasible.
Bill 152 goes on to establish the manner in which the innocent purchaser or lender can obtain compensation from the Land Titles Assurance Fund (the “Fund”) and the way in which the true owner of the property can obtain an order putting title back into his or her own name. To protect the title of the true owner, the Director of Titles has the ability to register a caution where it appears that a registered instrument may be fraudulent and a hearing will be held for rectification of the register.
My August papers talked about the element of uncertainty in terms of compensation from the Fund and Bill 152 does not eliminate that concern. There still remains an obligation for a person to attempt to recover just compensation for the loss themselves under section 57(1). The Fund remains a fund of last resort – the injured party must first make all reasonable efforts to obtain compensation elsewhere before pursuing a claim against the Fund. In addition a person must demonstrate “the requisite due diligence as specified by the Director” in order to qualify for the compensation. Questions remain as to the manner in which compensation will be given and the qualification before payment. However, it seems less abusive to have that standard when it isn’t the true owner that is looking for compensation, but rather it is the purchaser or lender in a fraudulent transaction. They presumably would have had some ability to review the fraudulent transaction before accepting the transfer or charge and, if they used appropriate due diligence, may have prevented the same from occurring.
Accordingly, Bill 152 reverses the position in the cases that I reviewed in August. Now any purchaser or lender who received its title or charge in a fraudulent transaction on or after October 19, 2006, whether innocent or fraudulent, will not obtain good registerable title and, if innocent, will have an opportunity to obtain compensation from the Fund. The true owner of the property will, subject to going through the procedure under the Act, be entitled to rectification of title and the return of his or her property.
It should be noted that Bill 152 sets out expressly that the Fund is a fund of last resort and if your property is title insured your insurer is not able to collect from the Fund. Bill 152 has expressly said that claims against the Fund can’t be made by an insurer or as a subrogated claims, the kind an insurer would make. If you are title insured, once the title issue is resolved it is your insurer, not the Fund, that compensates you.
The court came to this conclusion by insisting that it was necessary to look pointedly into the question of deferred indefeasibility and immediate indefeasibility, concepts which the Court of Appeal in the Household Realty case said were not necessary to consider to reach a decision. In the Lawrence case, the Court of Appeal did an extensive analysis of those concepts and decided that deferred indefeasibility governed.
The court in Lawrence relied upon a judgment of a higher court, the Supreme Court of Canada, in United Trust Co. v. Dominion Stores Ltd.,  2 S.C.R. 1915 (“United Trust”) which the Court “viewed within the context of policy considerations”. The United Trust case has long stood for the proposition that a purchaser with actual notice of an unregistered interest affecting the lands could not rely on the provisions of the Act to extinguish that interest. In that case United Trust had actual notice of an unregistered lease in favour of Dominion Stores, had tried to negotiate a surrender of that unregistered lease and when it couldn’t, took title and tried to argue that the Act had extinguished the unregistered lease.
In that case, Chief Justice Laskin, in a dissenting opinion, had argued that immediate indefeasibility model applied under the Act and therefore United Trust would take the property free of the lease. The majority however, did not focus on either deferred or immediate indefeasibility but concluded that the Act did not result in an extinction of the doctrine of actual notice. United Trust took the property subject to the unregistered Dominion lease that it was aware of. In the Lawrence case the Ontario Court Appeal said that the “United Trust” decision meant that the Supreme Court had adopted the deferred indefeasibility model even though the language of the Supreme Court decision did not expressly say so.
While there could still be a debate between the Household Realty and Lawrence decisions going forward, there is no question that the Lawrence decision clearly reviews and rejects Household. In addition, the concept of deferred indefeasibility was relied upon in two lower court title fraud decisions in October and November of 2006 (Rabi v Rosu (2006) 48 R.P.R. (4th) 1 and Home Trust v. Zivic  O.J. No. 4561) where, on the specific facts of each case, the Household Realty decision was distinguished and fraudulent charges were held invalid. Further, now that Bill 152 has been enacted, the debate only relates to those fraudulent acts which occurred prior to October 19, 2006 and will be of relatively limited scope. It is most appropriate to now take Lawrence as the law in Ontario for fraudulent transactions which occurred prior to that date and one can reasonably say that the Court of Appeal summarizes the current status of the law as follows.
Obviously, a paper of this nature can only give general advice and each reader should fully inform his own lawyer of the facts before getting specific advice that can be relied upon. When I read what I said in the Lawyers Weekly article last August, notwithstanding Bill 152 and the Lawrence case, I think the best general advice remains the same. For a purchaser or lender receiving a conveyance of a home, it’s prudent to title insure for several reason. First, if the conveyance to you is fraudulent you could be, in the wording of the Lawrence case, the “intermediate owner” yourself and your title or charge would be void as it was made pursuant to a fraudulent instrument under Section 78(4.1). Second, the title insurance policy covers you for future fraudulent acts such as a later fraudulent transfer or charge. Third, as a title insurance policy is an indemnity policy, a title insurer is obliged to pay your litigation costs to protect the title that the title insurer has insured whether as an “intermediate owner” or a true owner obtaining rectification of title. Fourth, if you lose title or your title is subject to a charge, a title insurer would have an obligation to pay under the policy once the title question has been settled. A claim for compensation under the Act would require you to go through the process of showing that: a) you are unable to get compensation from other sources, b) you have met the obligation of doing reasonable due diligence (as set out by the Director of Titles) and, c) the claim has been made within a six year time limitation period. In addition to the cost and delay these are all possible ways to lose compensation. For a purchaser or lender initially acquiring title to a home, my general advice would remain the same – obtain title insurance coverage.
My advice with respect to an existing owner of a residential property would also stay the same. Bill 152 has added greater protection for an existing owner because the risk of the most extreme downside, that you could lose title to your home as a result of fraudulent activity, is now greatly reduced. Subsection 78(4.1) now provides that subsection (4) does not apply to a fraudulent instrument registered on or after October 19, 2006. For the owner who occupies the property that virtually eliminates risk because any transaction that dealt with your title would be fraudulent and it is hard to conceive of any subsequent one that would not also be held to be fraudulent because your presence at the property would always need to be explained. However, where you are not in possession of the property, I think it generally still remains prudent to title insure today unless you are very scrupulous and extremely comfortable with the persons who are occupying your property.
Lang Michener LLP was recently successful for a client and the client obtained compensation for in a title fraud case in which the client leased its property to a tenant who committed the fraudulent act of conveying title to an innocent third party purchaser who put a charge on the property. The case was challenging because the Fund’s decision to pay compensation was reached this year, after the Lawrence case, but we needed to advise the client two years ago, before the Lawrence case was decided, whether they should litigate the innocent third party’s claim that he had good title. Relying upon the Household Finance case and concerned that costs incurred in the litigation would be disallowed by the Fund we advised the client to notify the Fund and not to litigate. The Fund’s decision this year confirmed that that advice was good and both compensated the client for their loss and paid the legal costs incurred.
Under Bill 152, if that situation were happening today, the conveyance to the innocent third party (“intermediate owner”) would be made by a fraudulent person, someone who held himself out to be the registered owner of the land but was not, so that conveyance would be void under Subsection 79(4.1), although the “intermediate owner” would be entitled to compensation from the Fund. Unfortunately, the charge from that “intermediate owner” (or a subsequent conveyance by that “intermediate owner”) to a “deferred owner” would likely have been held valid. I do not know what due diligence the lender did, but if it had visited the property it would have found the fraudulent person selling the property in possession. Subsection 78(4.2) says expressly that nothing in subsection (4.1) invalidates the affect of a registered instrument that is not a fraudulent instrument.
Accordingly, if those events had happened today, while Bill 152 would have given our clients title, the charge would be valid and our clients would still need to claim against the Fund to pay the charge. Notionally, the chargee could sell the property under the power of sale rights in its valid charge. Title insurance coverage would be useful to both pay the cost of litigating these matters and to provide compensation for the valid charge.
In a recent unreported title insurance case, Nadvornianski v. The Stewart Title Guaranty Company, 2006 CanLII 21787 (ON S.C.) (the “Nadvornianski Case”) Stewart Title brought a preliminary motion that a nominee, holding title to a property for her husband and a third party, did not have an “insurable interest” under the title insurance policy based on three Ontario insurance cases. The court held that there was a real question to decide as to whether or not the named insured had an “insurable interest” and said that the matter should be determined at trial.
The claim was one against both Stewart Title and the lawyers who acted for Nadvornianski in respect of the exact location of a water line and sewer line that were the subject of a registered easement. The Plantiffs’ claimed that the actual location of the pipes caused them to alter their designs, Stewart Title was liable for their financial losses under the title insurance policy and that their lawyers were negligent in failing to determine the nature and extent of the easement. While the claim seems “soft” and I can understand why both Stewart Title and LawPro would want to find any reasonable basis to defeat it, it raises interesting questions about “insurable interest” under a title insurance policy and provides a note of caution for lawyers acting for insureds to be certain that they are careful to disclose to title insurers the full circumstances surrounding any title insured purchase.
Historically, there was no common law principle stopping citizens from either betting on contingencies or insuring their own losses. It was difficult to distinguish insurance from gambling. The England, the Marine Insurance Act in 1745 and the Life Insurance Act in 1774 outlawed wagers made under the guise of insurance, as people were required to have an “interest” in the object of their insurance. In Canada the need for an “insurable interest” developed by both common law and statute was based on three policies: 1) a policy against wagering, 2) a policy against the limitation of indemnity (insurance is just to maintain the status quo not to provide a profit) and 3) a policy of removing incentives to destroy the insured property (if you can profit when your neighbour’s house burns, you can gain if you cause the fire). Accordingly, having an “insurable interest” is a basic principle in the insurance area.
Based on a number of Canadian cases from the leading case of Kosmopoulos v. Constitution Insurance Co. of Canada  1 S.C.R. 2 to the three specific cases cited in the Nadvornianski Case, a nominee that does not hold any actual interest in a property may not be entitled to the benefit of a title insurance policy even though it holds registered title and the premium has been paid for coverage in its name. As well, in addition to that “insurable interest” question explored in the Nadvornianski case, there is also the straightforward exclusion from coverage 3(c) in a title insurance policy which says the insurer will not pay loss or damage which arises by reason of defects, liens, encumbrances, claims or other matters “resulting in no loss or damage to the insured claimant”. If the insured claimant is simply a nominee that exclusion could be argued as well.
Great care must be taken in acting for a client on an owner’s policy to ensure that the title insurer is given with the correct information as to who the insured claimant actually is. It isn’t unusual to structure a transaction so that title is held by a nominee. There are a variety of legitimate business and tax structures which suggest that in many cases. However, a lawyer has a responsibility to his client to ensure that the title insurance coverage being purchased is preserved and to make full and adequate disclosure to the title insurer before the policy is issued. It is not uncommon to get an Additional Insured Endorsement, listing the names of all the parties with beneficial and registered interests in the property to ensure that that coverage remains in place.
In the Nadvornianski Case, whether or not the defendant lawyers would be liable to their clients for failing to point out the precise location of the sewer and water lines, they would seem likely to liable to their clients for failing to advise Stewart Title of precisely who the parties were that owned the property and would be suffering the loss.
It has been more that a month since the federal election and, even though I visit the CMHC web site regularly I can find no press release about whether the Conservatives have dropped the Liberal’s 2005 plan to provide title insurance coverage to owners on all CMHC insured loans.
In early 2005, Joe Fontana, the then Minister of Labour and Housing, was faced with an embarrassingly high CMHC profit level and a report to CMHC by a professor from the University of New Brunswick, Norman Siebrasse, that said that title insurance was a superior product to a solicitor’s opinion, particularly in the case of fraud. So, on April 22 of 2005 he issued an announcement that CMHC would be enhancing its mortgage loan insurance benefits to better protect Canadians’ investment in their homes by keeping them secure from title related risks. Basically CMHC was going to offer title insurance to homeowners for any transactions where CMHC was insuring the related loan. He promised that this enhancement would be available to consumers by the fall of 2005.
That announcement produced a huge number of complaints, particularly from lawyers in Western Canada. The CMHC announcement was delayed and, in December, Brian Tabor, the President of the Canadian Bar Association, sent a strong letter to CMHC objecting to the proposal. That letter clearly a “protect lawyers’ turf” missive and is, in my view inaccurate in some ways. For example, he states that the incidence of mortgage fraud is relatively low across Canada and that is not what lenders, title insurers or lawyers I speak to are saying. Mortgage fraud has been a massive problem the last few years.
However, with a change in government and a strong uproar from lawyers in the Conservative party’s western base, I speculated, when I spoke at the CBAO’s Annual Institute the day after the federal election, that the CMHC position was likely to be reversed. It will be interesting to see how quickly an announcement is made by Diane Finley, the Minister of Human Resources and Social Development from Ontario, one way or another.
Lang Michener’s expertise in title insurance often results in Bruce McKenna being interviewed and quoted on articles on the topic. Recently, a major article was published by Julius Melnitzer in Lexpert magazine in which Bruce was quoted extensively. Click on "Read More" for Bruce’s story about the article.
“In other words, commercial title insurance or not, there is always an important role for lawyers in commercial real estate deals. For example, while there's rarely a reason not to buy title insurance on a residential property, commercial title insurance isn't always appropriate. As Bruce McKenna explains, "Title insurance doesn't always have advantages and may add expense in single property, straightforward commercial transaction."
“More and more buyers and lenders are beginning to appreciate the fact that title insurance facilitates future dealings and refinancings involving the insured property, particularly when the arrangement is complicated or unconventional. "Once you get into the title insurance regime it's easy to do subsequent transactions involving the same property, "McKenna explains. When Toronto's Rogers Centre was sold from public to private interests for $300 million, lawyers turned to First Canadian Title for help after uncovering a very complex title involving a large number of rights and easements around the property. Title insurance is particularly useful in transactions spanning several provinces and involving multiple properties. From the insurer's perspective the underwriter can spread the risk over the full range of properties.
In the Wendy's/Tim Horton's merger, 660 of the 1200 sites involved were either freeholds or significant leaseholds. "The standard of due diligence accepted by First Canadian, who underwrote the risk, proved far less costly than full title opinions," recalls McKenna, who represented Wendy's.
Lang Michener continues to play a leading role in title insured transactions in Canada which results in us being referred to and consulted by both clients and writers. I recently gave another interview to a writer for another Canadian legal publication and will put excerpts here if they seem interesting.

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