Lavoie et al. v. T.A. McGill Mortgage Services Inc. et al.

[Indexed as: Lavoie v. T.A. McGill Mortgage Services Inc.]

Ontario Reports

Court of Appeal for Ontario,

Epstein, Lauwers and Pardu JJ.A.

April 3, 2014

119 O.R. (3d) 651 | 2014 ONCA 257

Case Summary

Insurance — Rescission — Plaintiff bringing action against mortgage broker and broker's professional liability insurer for damages arising out of broker's alleged fraudulent activities — Insurer rescinding policy based on material non-disclosure or misrepresentations by mortgage broker in its application for coverage — Motion judge not erring in [page652] granting summary judgment dismissing action against insurer — Undertaking to provide fraud coverage given by insurer to Financial Services Commission of Ontario not negating insurer's right of rescission — Undertaking predicated on existence of valid policy — Motion judge not erring in failing to grant plaintiff relief against forfeiture.

The plaintiff brought an action against a mortgage broker and the broker's professional liability insurer for damages arising out of the broker's alleged fraudulent activities. After the action was commenced, the insurer elected to rescind the insurance policies because of material misrepresentations and non-disclosure by the broker made in the course of applying for coverage. The motion judge granted the insurer's motion for summary judgment dismissing the action against it on the basis that the rescission of the policies was valid. The plaintiff appealed.

Held, the appeal should be dismissed.

When it applied for coverage, the broker failed to disclose that the plaintiff had made a demand for payment of funds and had threatened a lawsuit for negligence and misrepresentation. The motion judge did not err in finding that the failure to disclose those facts constituted misrepresentations and that the misrepresentations were material, entitling the insurer to rescind the policies and rendering the policies void ab initio. The motion judge did not err in finding that an undertaking given by the insurer to the Financial Services Commission of Ontario to add a fraud endorsement to the policies did not negate the insurer's right of rescission. The undertaking was not a self-contained policy enforceable on its own terms. Moreover, given the wording of the undertaking, a third party claim depended on the existence of a valid policy. Allowing rescission did not effectively nullify the fraud coverage provided for the benefit of third parties. If there had been no material misrepresentation in the application and a fraud-based claim had been made during the currency of the policy, the fraud coverage would have applied for the benefit of third parties. The insurer was not estopped from relying on the misrepresentations to rescind the policies because of the undertaking, as the plaintiff had not relied on any actions or statements by the insurer and as the undertaking to provide fraud coverage was predicated on the existence of a valid policy. The motion judge did not err in failing to exercise his discretion to grant the plaintiff relief against forfeiture under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43. Assuming that the plaintiff could apply under s. 98 for relief from forfeiture resulting from misrepresentations by the insured, relief would not be available to the plaintiff because the breaches constituted non-compliance with a condition precedent.

Cases referred to

Kozel v. Personal Insurance Co. (2014), 119 O.R. (3d) 55, [2014] O.J. No. 753, 2014 ONCA 130, 315 O.A.C. 378, consd

Other cases referred to

Bell Canada v. The Plan Group (2009), 96 O.R. (3d) 81, [2009] O.J. No. 2829, 2009 ONCA 548, 252 O.A.C. 71, 81 C.L.R. (3d) 9, 62 B.L.R. (4th) 157, 179 A.C.W.S. (3d) 40; Coronation Insurance Co. v. Taku Air Transport Ltd., 1991 16 (SCC), [1991] 3 S.C.R. 622, [1991] S.C.J. No. 96, 85 D.L.R. (4th) 609, 131 N.R. 241, [1992] 1 W.W.R. 217, J.E. 92-575, 6 B.C.A.C. 161, 61 B.C.L.R. (2d) 41, 4 C.C.L.I. (2d) 115, [1992] I.L.R. Â1-2797 at 1657, 30 A.C.W.S. (3d) 728; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1; Lloyd's Underwriters, Non-Marine Underwriters v. National Armoured Ltd., 1999 2590 (ON CA), [1999] O.J. No. 1718, 174 D.L.R. (4th) 493, 120 O.A.C. 340, [2000] I.L.R. I-3751, 88 A.C.W.S. (3d) 469 (C.A.), affg 1996 8104 (ON SC), [1996] O.J. No. 4187, 142 D.L.R. (4th) 506, 19 O.T.C. 174, 67 A.C.W.S. (3d) 798 (Gen. Div.); [page653] Mutual Life Ins. Co., N.Y. v. Ontario Metal Products Co., 1924 336 (UK JCPC), [1924] J.C.J. No. 6, [1925] 1 D.L.R. 583, 1924 CLB 286, 94 LJPC 60, [1925] 1 W.W.R. 362, 41 TLR 183, [1925] AC 344 (P.C.); Pilot Insurance Co. v. Sutherland (2007), 86 O.R. (3d) 789, [2007] O.J. No. 2596, 2007 ONCA 492, 51 C.C.L.I. (4th) 12, [2007] I.L.R. I-4611, 55 M.V.R. (5th) 38, 159 A.C.W.S. (3d) 280; Sayle v. Jevco Insurance Co., 1985 6520 (BC CA), [1985] B.C.J. No. 2574, 16 C.C.L.I. 309, 36 A.C.W.S. (2d) 462 (C.A.), affg 1984 346 (BC SC), [1984] B.C.J. No. 2757, 58 B.C.L.R. 122, 9 C.C.L.I. 54, [1984] I.L.R. Â1-1836 at 7062 (S.C.)

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98

Insurance Act, R.S.O. c. I.8, s. 129

Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29

APPEAL from the order of S.K. Campbell J. of the Superior Court of Justice dated March 15, 2013 granting the defendant's motion for summary judgment dismissing an action against it.

Raymond G. Colautti, for appellants.

Mary Margaret Fox and Paul Emerson, for respondent.

The judgment of the court was delivered by

[1] PARDU J.A.: — The appellants, the plaintiffs in this action, claim damages arising out of alleged fraudulent activities by a mortgage broker. The defendants are the mortgage broker, T.A. McGill Mortgage Services Inc. ("MMSI"), and its associates, and the respondent, Echelon General Insurance Company, MMSI's professional liability insurer under errors and omissions policies that provided fraud coverage. All defendants, except for Echelon, have been noted in default. The motion judge granted Echelon's summary judgment motion to dismiss the action against it on the basis that Echelon had validly rescinded the policies because of material misrepresentations and non-disclosures MMSI made in the course of applying for coverage.

[2] The appellants appeal on the following grounds: (1) the motion judge erred in holding that any misrepresentations or omissions relating to events before fraud coverage was in place were material; (2) Echelon's undertaking to the FSCO conferred upon the appellants rights that are not voided by the rescission of the insurance policies; (3) Echelon should be estopped from advancing a legal position that denies coverage to the appellants; (4) the appellants are still entitled to relief against forfeiture pursuant to s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[3] For the reasons set out below, I would dismiss the appeal. [page654]

The Factual Background

[4] In early March 2008, MMSI applied to Echelon for professional liability errors and omissions coverage. In this application, MMSI denied that it or its partners, officers, employees or subsidiaries had "ever been the recipient of any allegations of professional negligence in writing or verbally which may reasonably give rise to a claim". Further, MMSI denied being "aware of facts, circumstances or situations which may reasonably give rise to a claim, other than as advised above". The policy came into force on April 1, 2008. It did not provide coverage for fraudulent acts.

[5] Subsequent amendments to the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 and regulations, required insurers that provided professional liability errors and omissions coverage to mortgage brokers licensed and carrying on business in Ontario, such as Echelon, to add a fraud endorsement to their policies in the form approved by the Financial Services Commission of Ontario ("FSCO"). Effective July 1, 2008, the Echelon policy issued to MMSI was amended to add the fraud endorsement.

[6] Echelon undertook to the FSCO to provide the fraud endorsement on the following terms:

4. The policy covers all claims, subject to standard exclusions, made during the term of the policy for acts occurring at any previous time, providing the insured had no prior knowledge. The policy will not impose a retroactive date exclusion.

5. Injured third parties will have a direct right of action against the insurer under the policy, without affecting the insurer[']s right to adjudicate the claim in accordance with the policy's term[s] and conditions and the right of the insurer's right of action [sic] against the insured.

6. Regarding the "Fraud" endorsement:

The policy certificate will include additional coverage for loss resulting from fraudulent acts and will operate to protect the public within the minimum limits required for the Errors and Omissions policy . . .

Claims under the endorsement may be made in the same manner as claims made under the policy, including notice of claim to the insurer and a direct right of action for injured third parties.

14. . . . [T]he written confirmation received from the Insurer must contain several acknowledgements and undertakings, namely:

The Insurer must acknowledge that at no time will any policy issued fall short of the standards set out in the minimum requirements set out in the minimum requirements above, including an acknowledgement that the FSCO endorsement will be automatically added to every policy issued. [page655]

The Insurer must undertake that all interpretations of any policy term will never produce a result that is less than the minimum requirements set out in this letter and will always be deemed to result in an interpretation in accordance with at least the appropriate minimum requirements.

The Insurer must acknowledge that, subsequent to approval of its policy by FSCO, the Insurer will not make or cause to be made any material changes limiting, restricting or reducing the coverage[] in its policy in any respect without prior notice to, and the approval of FSCO.

[Emphasis added]

[7] The actual fraud endorsement provided as follows:

This Policy [d]oes not apply to:

Damages arising out of any act, omission or misrepresentation of the Insured that is dishonest, fraudulent, criminal, or malicious.

However, this exclusion shall not apply to:

1. Damages arising out of any act, omission or misrepresentation of the Insured that is dishonest, fraudulent, criminal, or malicious and was committed by the Insured acting within the scope of the Insured's Professional Services as defined in the policy.

[8] In March 2009, MMSI applied to renew the policy. In its March 2009 application, MMSI answered the following question in the negative:

14. During the past three years, are you, your employees or any of your agents aware of any circumstance, allegation, contention or incident which may potentially result in a claim for an error or omission in the performance of a professional service being made against your entity, you, any mortgage broker or agent or employee present or past associated or working with your entity?

[9] In completing the March 2009 application, MMSI agreed to the following:

It is understood and agreed that failure to provide true and complete response to any of the questions, statements or request for information in this Application or to provide any other information material to this Application may, at the sole option of the Company, result in the voiding of the insurance policy issued in reliance on this Application and/ or denial of coverage for specific claims asserted against us (the Applicant) or any other insured under the policy.

[10] In September 2009, the appellants brought an action against MMSI and its associates for damages arising out of alleged fraudulent activities. Echelon was named as a defendant because it was MMSI's professional liability insurer.

[11] In late 2010, Echelon became aware of Crown disclosure in an unrelated action. Based on the documents contained in this disclosure, Echelon concluded that MMSI's answers on the applications had not been truthful. By letter dated March 24, 2011, [page656] Echelon advised MMSI that it had elected to rescind the policies on the basis of material non-disclosures/ misrepresentations in the applications, thereby voiding the policies from the beginning.

[12] On March 31, 2010, the FSCO suspended MMSI's mortgage brokerage licence and revoked it on April 16, 2010.

[13] Echelon brought a motion for summary judgment seeking the dismissal of the appellants' action as against it.

The Decision under Appeal

[14] The motion judge granted Echelon's motion for summary judgment and dismissed the appellants' action as against Echelon.

[15] The motion judge determined that the relevant facts were "largely uncontroversial", and that the issues before him could be appropriately resolved on a motion for summary judgment since a full appreciation of the facts could be achieved without a trial.

[16] The first legal issue the motion judge considered was whether Echelon had the right to rescind the policies. He found that MMSI did not disclose the following facts in the March 2008 and March 2009 applications for insurance coverage:

(1) On October 5, 2007, the solicitors acting for one of the plaintiffs in this action, David Lavoie, made a demand for payment of funds and threatened to commence a lawsuit.

(2) Counsel for Mr. Lavoie, by correspondence dated January 28, 2008, gave MMSI an ultimatum demanding payment failing which an action would be commenced alleging negligence and misrepresentation.

(3) Between January 31, 2008, and the effective date of the first policy, offers of settlement were exchanged between MMSI and counsel for Mr. Lavoie.

[17] The motion judge held that MMSI's failure to disclose these facts constituted misrepresentations, at paras. 50-52:

Plaintiffs' counsel argues that not only was the misrepresentation not material, but that there was no misrepresentation. He bases that argument on the fact that at the time of the application for insurance and the effective date of the policy, fraud was not covered. Therefore, on these facts, counsel for the plaintiffs submits to the court that questions 9(a) and (b) and the answers to those questions could be reasonably interpreted to mean that fraud could not "reasonably give rise to a claim" because fraud was not covered. Counsel argues that the only correct answer was "No".

I disagree. Counsel's position ignores the specific question. Was McGill aware of any circumstance, allegation, contention or incident which might result in a claim for errors or omissions? Information in the possession of McGill and MMSI made a negative response to the question wrong. The correspondence from the Lavoies' law firm and the draft statement of claim [page657] were clear and unequivocal. There was a potential claim and indeed a potential claim for fraud. At the time the second application was completed and the fraud coverage included, McGill and MMSI once again answered the question "No" in response to the question.

I find the answers given by McGill and MMSI were misrepresentations. The court then needs to consider whether or not these misrepresentations were material.

[18] The motion judge held that MMSI's misrepresentations were material in accordance with Mutual Life Insurance Co., N.Y. v. Ontario Metal Products Co., 1924 336 (UK JCPC), [1924] J.C.J. No. 6, [1925] 1 D.L.R. 583 (P.C.). Relying on Coronation Insurance Co. v. Taku Air Transport Ltd., 1991 16 (SCC), [1991] 3 S.C.R. 622, [1991] S.C.J. No. 96, he also concluded that the misrepresentations entitled the insurer to rescind the policies and render the policies void ab initio, at paras. 57 and 58:

I find these misrepresentations were material. It is a fair conclusion on the evidence that had McGill and MMSI given correct answers to the questions, Echelon's decision to accept the risk would have been influenced. It is reasonable to conclude that Echelon might have declined the risk or requested a higher premium. The issue then becomes what is the effect of these material misrepresentations?

Rescission of a policy by an insurer on the basis of a material misrepresentation for non-disclosure renders the policy void ab initio[.]

[19] The second legal issue the motion judge considered was whether the undertaking given to the FSCO negated Echelon's right of rescission.

[20] The motion judge rejected the appellants' argument that the undertaking was a self-contained policy enforceable on its own terms. Relying on Pilot Insurance Co. v. Sutherland (2007), 2007 ONCA 492, 86 O.R. (3d) 789, [2007] O.J. No. 2596 (C.A.), he held that the undertaking was analogous to an endorsement that varies the underlying policy but does not have independent existence.

[21] The motion judge considered the impact of the FSCO undertaking on Echelon's claim to have a right to rescind based on material misrepresentation. At para. 67, he noted that "[t] here is nothing in the FSCO undertaking/guidelines which addresses the subject of misrepresentation in application for E & O insurance or the insurer's right to rescind such a policy". Significantly, the motion judge went on to agree with Echelon's argument that "the FSCO guidelines assume and are predicated upon the existence of a valid policy of insurance".

[22] The motion judge rejected the argument that clause 10 of the undertaking to the FSCO gave claimants a direct right of action against the insurer despite the insurer's right of rescission, stating, at para. 69: [page658]

Clause 10 of the undertaking states that the injured parties will have a direct right of action against the insurer under the policy. However, that is stated to be given without affecting the insurer's right to adjudicate the claim in accordance with the policy's terms and conditions and the insurer's right of action against the insured.

[23] The motion judge concluded, at paras. 72-73, that

[A]ny direct right of action was subject to the defence insurers can raise against the insured. In this case it is the insured's material non-disclosure/misrepresentation that justifies rescissions of the policy, rendering them void ab initio.

The defendants' affidavit, which is uncontradicted, establishes that the subject to language found in clause 10 of the guidelines was added at the suggestion of Echelon. This fact further supports the argument that the direct right of action does not remove the defences available to the insurer as against third parties.

[24] Finally, the motion judge concluded that Echelon was not estopped from rescinding the policy because of the FSCO undertaking for two reasons; first, because the appellants never relied upon the undertaking; and second, because the undertaking was not incompatible with Echelon's right to rescind the policy because of material misrepresentation.

Issues

[25] The appellants argue that the motion judge erred in concluding that their right to pursue Echelon directly for losses caused by MMSI's fraud was no longer available because of Echelon's rescission of the policies based on MMSI's material non-disclosure.

[26] Their arguments can be summarized as follows:

(1) At the time of MMSI's first application for insurance in 2008, there was no fraud endorsement in the policy. The motion judge erred in holding that any misrepresentations or omissions relating to events before fraud coverage was in place were material.

(2) Echelon's undertaking to the FSCO barred it from refusing the claims of the appellants even in the event of material misrepresentation by the insured.

(3) Echelon should be estopped from advancing a legal position that denies coverage to the appellants.

(4) If Echelon was legally entitled to rescind, the appellants are still entitled to relief against forfeiture pursuant to s. 98 of the Courts of Justice Act. [page659]

Standard of Review

[27] The errors the appellants allege do not arise from any findings of fact by the motion judge. Rather, the appellants submit that the motion judge erred in interpreting the applicable law and relevant legal documents, namely, the undertaking to the FSCO, and Echelon's contract of insurance with the mortgage broker. The parties agree, and I accept, that the standard of review on this appeal is therefore correctness: Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at para. 8; Bell Canada v. The Plan Group (2009), 96 O.R. (3d) 81, [2009] O.J. No. 2829, 2009 ONCA 548, at paras. 30-31.

Analysis

Did MMSI make material misrepresentations or non-disclosures in its insurance applications?

[28] The appellants argue that the information that MMSI did not disclose was irrelevant to the coverage being contracted for since the 2008 policy did not, at the time the application was completed, include fraud coverage. Therefore, the non-disclosed information was not material.

[29] The test of materiality is measured by the standard of a reasonable insurer. An inaccuracy in an answer on an application for insurance does not permit the insurer to void the policy unless accurate answers would have led a reasonable insurer to act differently by refusing to accept the risk or by imposing special conditions: see Sayle v. Jevco Insurance Co., 1984 346 (BC SC), [1984] B.C.J. No. 2757, 58 B.C.L.R. 122 (S.C.), at p. 126 B.C.LR., affd 1985 6520 (BC CA), [1985] B.C.J. No. 2574, 16 C.C.L.I. 309 (C.A.).

[30] The question of materiality is one of fact. Here, there was uncontradicted evidence, provided by a program manager in a senior underwriting position with Echelon and by an independent underwriter, indicating that the misstatements and non-disclosures in respect of the 2008 and 2009 applications were material to the decision to offer insurance.

[31] The motion judge did not err in accepting this evidence, nor in relying on this evidence to find that these inaccuracies were material ones that would justify rescission of the policies by Echelon.

Was rescission available to Echelon in the light of the FSCO fraud coverage undertaking?

[32] The appellants argue that the undertaking to the FSCO vested the appellants with an independent direct right of action [page660] against Echelon with respect to fraud coverage that cannot be voided by the rescission of the insurance policies.

[33] I disagree. The motion judge correctly found that the wording in the FSCO undertaking, that "[i]njured third parties will have a direct right of action against the insurer under the policy, without affecting the insurer[']s right to adjudicate the claim in accordance with the policy's term[s] and conditions" (emphasis added), meant that a third party claim depended on the existence of a valid policy. Accordingly, because Echelon was entitled to rescind the policies and did so, the appellants do not have a direct right of action against Echelon.

[34] The appellants also argue that to allow the insurer to rescind the policies effectively nullifies the fraud coverage provided for the benefit of third parties, and for that reason it could not have been intended to allow an insurer to rescind the policies on the ground of material misrepresentations.

[35] I do not agree. Allowing rescission in these circumstances does not go so far as to nullify coverage for the benefit of third parties. If there had been no material misrepresentation in the application and a fraud-based claim had been made during the currency of the policy, the fraud coverage would have applied for the benefit of the third party plaintiff or plaintiffs.

Should Echelon be estopped from advancing a position that denies coverage to the appellants?

[36] The appellants submit that Echelon should be estopped from advancing a position that denies coverage based on Echelon's undertaking to provide fraud coverage to insured parties.

[37] The motion judge was correct to reject the appellants' argument that the insurer was estopped from relying on the misrepresentations to rescind the policies because of the undertaking, in light of the evidence that the appellants had not relied on any actions or statements by the insurer, and in light of the fact that the undertaking to provide fraud coverage is predicated on the existence of a valid policy.

Did the motion judge err in failing to exercise his discretion to grant the appellants relief against forfeiture pursuant to [s. 98](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html) of the [Courts of Justice Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html)?

[38] The appellants submit that the court has a broad power to relieve against forfeiture of fraud coverage caused by McGill and MMSI's misrepresentations under s. 98 of the Courts of Justice Act, and that it would be appropriate to do so in the circumstances of this case. [page661]

[39] It is well established that an applicant for insurance must act with the utmost good faith. This means that, where the applicant makes a material misrepresentation in an application for coverage, the insurer has the right to rescind the policy, rendering it void from the outset: see Lloyd's Underwriters, Non-Marine Underwriters v. National Armoured Ltd., 1996 8104 (ON SC), [1996] O.J. No. 4187, 142 D.L.R. (4th) 506 (Gen. Div.), affd 1999 2590 (ON CA), [1999] O.J. No. 1718, 174 D.L.R. (4th) 493 (C.A.).

[40] While some policies of insurance and some statutory regimes explicitly provide that a third party is unaffected by material non-disclosure by the insured, there is nothing in the policies relevant to that effect.

[41] After argument of this appeal, the court invited submissions from the parties about the impact, if any, of the decision in Kozel v. Personal Insurance Co. (2014), 119 O.R. (3d) 55, 2014 ONCA 130, released after argument of the appeal. In Kozel, this court held that s. 98 of the Courts of Justice Act can operate, in addition to s. 129 of the Insurance Act, R.S.O. 1990, c. I.8, to grant relief against loss of a right caused by a failure to perform a covenant or condition in a contract of insurance. The motor vehicle insurer argued that authorization to drive was a statutory condition precedent to coverage. Since the insured had allowed her driver's licence to lapse at the time of the accident, the insurer argued there could be no relief from forfeiture.

[42] This court noted, at para. 40 of Kozel, that when a breach constitutes imperfect compliance with a policy term, relief under s. 98 of the Courts of Justice Act is available. In contrast, if the breach amounts to non-compliance with a condition precedent to the insurance policy, relief under s. 98 is not available. This court indicated, at para. 41, that the focus in this analysis "is on whether the breach of the term is serious or substantial. Where the term is incidental, its breach is deemed to be imperfect compliance; where the provision is fundamental or integral, its breach is cast as non-compliance with a condition precedent". On the facts in Kozel, this court held that the contractual language describing the term as a condition was not conclusive, and that the lapse of the licence amounted to imperfect compliance with a policy term rather than non-compliance with a condition precedent.

[43] In my view, Kozel does not assist the appellants. Assuming that the appellants can, pursuant to s. 98 of the Courts of Justice Act, apply for relief from forfeiture resulting from misrepresentations by the insured, relief under s. 98 would not be available to the appellants because the breaches in this case constituted non-compliance with a condition precedent. The [page662] misrepresentations and omissions in the applications were material and went to the heart of Echelon's decision to provide coverage. The fundamental impact of a material misrepresentation in an application for insurance is reflected in the jurisprudence entitling an insurer to rescind a policy in these circumstances. The motion judge did not err in refusing to grant relief from forfeiture pursuant to s. 98 of the Courts of Justice Act.

Disposition

[44] For these reasons, I would dismiss the appeal. I would award costs to the respondent fixed at $33,000, inclusive of HST and disbursements.

Appeal dismissed.

End of Document