Bob Aaron firstname.lastname@example.org
January 6, 2007
Some U.S. title insurers seek to avoid paying claims
Recent decision may be harbinger of coming trend for policy holdersA recent decision of the Ontario Superior Court of Justice may be the harbinger of a trend by some American-controlled title insurers to deny coverage to their insured policy owners in Ontario.
The story begins back in 2000, when Bogdan Nadvornianski and Andrej Lechowicj bought a house in Toronto for the purpose of renovation and resale. They took title in the name of Barbara Nadvornianski, who signed an agreement confirming that she had no financial interest in the property and was holding legal title solely as a trustee for her husband and his business partner.
The agreement also provided that the two men would pay all costs and expenses in connection with the property, and that they would reimburse Barbara for any claims or actions which might arise because the deed was in her name.
The two partners also signed a joint venture agreement, which said that they would equally share all the expenses and all the profits from the purchase and sale of the property.
In addition, all three parties signed a mortgage for $281,500 with their credit union. The loan agreement clearly disclosed to the lender that the property was really owned by both men, and that Barbara was only holding it in trust for them as a convenience.
At the time of closing, the lawyers who were acting for the purchasers and the credit union arranged a Stewart Title insurance policy.
The policy named only Barbara as the registered owner, and Stewart was not aware that the real owners were her husband and his business partner.
During the renovations, it was discovered that there was an easement for water and sewer pipes through the front yard, forcing the renovators to alter their original plans.
Eventually, a house they hoped to sell for almost $1 million sold for less than $800,000.
The Nadvornianskis believed that the existence and location of the easement caused them financial losses, and sued Stewart Title as well as their lawyers, hoping to recover either from the title insurer or their lawyers' insurance company.
Faced with the Nadvornianski claim, Stewart Title took the position that since Barbara had no financial interest in the property in her role as a trustee owner, she had no "insurable interest" in the house either, and had nothing to gain or lose as a result of her ownership of it.
Under Ontario insurance law, the owner of a property insurance policy cannot make a successful claim if he or she does not have an "insurable interest" in the subject matter of the policy, such as a car or a house.
To date, however, this rule has never been applied to a title insurance policy here.
Stewart's defence to the Nadvornianski litigation was that they didn't have to pay out under the title insurance policy since Barbara wasn't the owner and they had no notice of the interest of the two real owners when they issued the policy.
Stewart thought the claim had no merit and should not even go to trial.
Last April, the insurer asked an Ontario court to toss out the claim against it.
In June, Justice Douglas Shaw denied Stewart's application to dismiss the case against it without a trial. He ruled that the issue of whether Barbara could or could not claim compensation against the title insurer could only be settled at a trial, and not at a preliminary stage.
The court's decision has stimulated considerable discussion in the legal press partly because of the novel point of law it raises, partly because of the fact that the lawyers who arranged the insurance got sued by their clients, and most importantly because the litigation was commenced in the first place.
In an interview with The Lawyers Weekly, Morris Cooper, counsel for the Nadvornianskis, said, "What we're seeing for the first time is a title insurer acting just like any other insurer, making a technical argument in order to avoid paying a claim. In my view, now that title insurers have established a market for themselves, they're acting like other insurers. "
In last month's issue of Real Property Reports, Toronto lawyers Jeffrey W. Lem and Matthew Singerman published an exhaustive commentary on the case, noting "the fact that the Nadvornianski litigation exists at all is the most troubling aspect of this situation," since coverage denials have not yet become a significant feature of the title insurance landscape in Ontario.
The authors refer to the 2002 decision of the Supreme Court of Canada in Whiten v. Pilot Insurance.
In that case, Canada's highest court upheld a jury award of $1 million in punitive damages against a casualty insurer.
It had steadfastly refused to pay out a claim for the loss of a house due to fire, even though it had no evidence to support its position that the loss was due to arson.
Referring to the Pilot Insurance case, Lem and Singerman point out that the "truly obscene coverage denials" by some Canadian casualty insurers has not, to date, been seen from Canada's title insurers.
That, however, may well be changing. Litigation involving title insurers is quite common in the United States.
This week I conducted an online search in the Quicklaw database to see if three U.S.-based title insurers, currently doing business in Ontario, were parties (either as plaintiffs or defendants) in reported American court cases.
To my surprise, I counted a total of 2,913 reported decisions in federal and state courts in recent years. Many of them involve coverage denials.
There are few if any reported cases involving title insurers in Canada, although some may have gone to mediation or arbitration to save litigation costs and keep the results private.
In their commentary, Lem and Singerman warn that the Nadvornianski case may be the herald of a "coming of age" of the title insurance industry in Canada, with insurers increasingly resorting to technicalities to deny coverage.
They warn that it is now time for Ontario solicitors and presumably their clients to factor in the risk of coverage denial as a criterion in selecting among title insurers.
A point of disclosure here: I am an elected director of the Law Society of Upper Canada, which owns the Lawyers Professional Indemnity Company, or LawPRO.
That company operates its own title insurer, TitlePLUS, which insures errors or omissions on the part of the lawyer handling the transaction whether or not the title policy covers the particular risk. I have no active role in the management of LawPRO or TitlePLUS.