By: Camille M. Dunbar, Litigation Associate
In a recent decision from the Ontario Superior Court, Nodel v. Stewart Title Guaranty Co., Justice Matheson applied well established policy interpretation principles to an “exception from coverage” clause contained in a schedule to a title insurance policy, which effectively operated as an exclusion clause. Typically, an exclusion clause bars coverage when a claim otherwise falls within the initial grant of coverage. Exceptions then bring an otherwise excluded claim back within coverage. Oddly, in the title insurance policy issued by the respondent, Stewart Title Guaranty Co.’s (“Stewart Title”), both the exclusion and “exception from coverage” clauses set out risks that fell outside the scope of the coverage grant. It was one such “exception from coverage” clause that was at issue in Nodel, specifically the interpretation of the words “are paid to”.
It all started with a fraudulent mortgage transaction. The applicant, Karl Nodel (“Mr. Nodel”), a private lender, agreed to provide a loan to (who he thought was) John Colarieti (“Mr. Colarieti”). Mr. Colarieti purported to be borrowing the funds for investment purposes. The proposed security was a second mortgage registered on his property in Toronto.
Mr. Nodel hired Isaac Singer (“Mr. Singer”) to act on his behalf as the lender in the transaction. Colarieti hired Bryan Dale (“Mr. Dale”) to act on his behalf as the borrower. Prior to the close of the deal, Mr. Singer applied for title insurance from the respondent, Stewart Title, on behalf of Mr. Nodel to protect his investment against fraud.
Stewart Title had initially flagged the transaction for review because Mr. Dale was on a “flash list” of real estate lawyers with a prior disciplinary history with the Law Society of Upper Canada (“LSUC”). After an internal review, and upon receiving supporting documentation from Mr. Singer, Stewart Title cleared the flag and issued a title insurance policy (the “Policy”) to Mr. Nodel.
On closing, Mr. Singer disbursed the mortgage funds to Mr. Dale in trust for the borrower, according to a written direction from Mr. Dale himself. A mortgage was registered against Mr. Colarieti’s property.
The fraud was discovered shortly thereafter. It was also discovered at that time that Mr. Dale had disbursed the mortgage proceeds from his trust account to unrelated third parties, not to Mr. Colarieti.
Mr. Nodel made a claim under the Policy. Although Stewart Title acknowledged that the Policy provided coverage for mortgage fraud, it denied coverage relying on the following exception from coverage clause:
This policy does not insure against loss or damage… which arise by reason of: …
2. Notwithstanding anything else contained within this Policy, in the event that the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder or holders, as the case may be
[. . .] 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 [. . .].
This clause removed coverage if the proceeds were not paid to one of the listed parties. In this case, the relevant party to which the proceeds ought to have been paid was the registered title holder, Mr. Colarieti.
When coverage under the Policy was denied, Mr. Nodel sued (among other parties) Mr. Singer for his loss on the mortgage transaction. Mr. Singer brought a third party claim against Stewart Title. The action was settled except with respect to Stewart Title. LawPRO, on behalf of Mr. Singer, proceeded against Stewart Title by way of an application for an interpretation of the exception from coverage clause relied upon to deny coverage and, in the alternative, for a relief from forfeiture.
Justice Matheson, writing for the Court, began her analysis by setting out the well-established principles governing policy interpretation:
i. when the language of the policy is unambiguous, the Court should give effect to clear language, reading the contract as a whole;
ii. when the language is ambiguous, the Court should rely on general rules of contract construction;
iii. in that regard, the contract of insurance should be interpreted to promote the reasonable expectations of the parties and a reasonable commercial result; and,
iv. if there remain ambiguities, they are construed against the insurer − coverage provisions are interpreted broadly and exception provisions narrowly.
The Court also pointed out that a clause that nullifies coverage will not be enforced. In addition, although the factual matrix is less relevant for standard form contracts, factors such as the purpose of the contract and the industry in which it operates should nevertheless be considered. The parties agreed that the purpose of the Policy was to provide insurance for mortgage fraud (among other things). The parties also admitted it was common practice to disburse funds to lawyers in trust for their clients.
The Court then turned to the exception from coverage clause at issue, specifically the phrase “are paid to any person or entity other than [. . .] to the registered title holder”. Stewart Title argued that monies are “are paid to” the registered title holder if the cheques is made out to them or wired to their bank account directly. Mr. Nodel argued that funds are paid to the registered title holder/borrower when they are disbursed to the title holder/borrower’s lawyer, in trust for title holder/borrower.
The Court found that the term “paid” was ambiguous. The Court pointed out, for example, that “paid” could mean that a person has received monies that they are entitled to. When funds are paid to a lawyer in trust for their client, the Court noted, the funds are not necessarily received by their client. As a result, if the term “paid to” required proper receipt by the borrower, the exception from coverage clause would be unenforceable because it would nullify coverage for fraud. In circumstances of fraud, the funds are never properly received by the purported borrower. While Stewart Title acknowledged that this was one potential meaning of “paid”, this definition was not advanced by the insurer as it would effectively nullify coverage and would therefore be unenforceable.
Having found that the clause was ambiguous, the Court moved on to apply the general rules of contract construction. The Court looked to the regulatory regime regarding client identification and the flow of trust funds as well as the common practice of lawyer holding and disbursing funds in trust on behalf of a client. LSUC by-law 9 requires lawyers holding funds in trust for their clients to withdraw funds only in specified circumstances, namely where the money is “properly required for payment to a client or to a person on behalf of a client”. When Mr. Singer disbursed the funds to the borrower’s counsel in trust for his client, borrower’s counsel was restricted in what could be done with those funds. Relying on the foregoing background facts, which would have been known by both the insurer and the insured, the Court found that the exception from coverage clause permitted payments to a lawyer in trust for his or her client.
In addition, given the accepted interpretative rule that ambiguities are construed against the insurer, the Court concluded that the clause did not incorporate the unexpressed requirement that cheques must be made payable to a listed approved party, or wired to them directly, or the subject of a special undertaking from their lawyer. By not expressing the manner of payment, the Court found that the impugned clause permitted multiple payment methods including disbursing the funds to the lawyer, in trust for his or her client.
Having found that the exception from coverage clause did not apply to bar coverage, the court did not address the alternative claim for relief from forfeiture.
This decision provides a recent application of the well-established principles of policy interpretation, as well as a close look at the meaning of the words “”are paid to” in what was effectively an exclusion clause in a title insurance policy. The Court confirmed that where the language of the policy is ambiguous, general rules of contract interpretation apply. The reasonable expectations of the parties and the surrounding circumstances must be considered to resolve the ambiguity. If all else fails, the doctrine of contra proferentem still applies to interpret ambiguities against the insurer as the drafter of the policy.
 Nodel v. Stewart Title Guaranty Co., 2017 ONSC 890 [“Nodel“].
 Nodel, supra at para. 43.
Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.
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