Court of Appeal for Ontario

Date: 2017-06-01 Docket: C62582

Judges: Strathy C.J.O., Gillese and Pardu JJ.A.

Between

Hercules Moulded Products Inc. Plaintiff (Appellant)

and

Robert J. Foster, Stewart Title Guaranty Company, Barat Farlam Millson and estate of Arthur Barat Defendants (Respondents)

Counsel:

• Michael Carlson, for the appellant
• Cynthia Kuehl, for the respondents

Heard: April 19, 2017

On appeal from: The order of Justice Lederman of the Superior Court of Justice, dated July 14, 2016, with reasons reported at 2015 ONSC 4967, 58 C.C.L.I. (5th) 283.

Reasons for Decision

[1] Introduction

Hercules Moulded Products Inc. ("Hercules") appeals from summary judgment granted in favour of Stewart Title Guaranty Company ("Stewart"). The motion judge held that Stewart was under no obligation to indemnify Hercules for certain losses said to have arisen from problems with two adjacent properties in Windsor, Ontario. Hercules had obtained title insurance from Stewart with a "Commercial Lender Endorsement" to protect its security, which was a mortgage granted by the owner of the Windsor properties to secure money lent to it by Hercules.

[2] Background Facts

At the time the money was advanced under the mortgage, there was a large and incomplete excavation for a proposed condominium development on one property and a multi-story office building on the other.

The mortgage transaction closed in February 2006 and the title insurance policy (the "Policy") was issued the same month.

Before Hercules's mortgage transaction closed in February 2006, Hercules was notified of an application brought by the City of Windsor (the "City") in the Superior Court of Justice for an order allowing the City to fill in the excavation on one of the Windsor properties because the condition of the property violated the City's Dirty Yard Bylaw. Following a hearing in March 2006, the court issued an order, dated March 22, 2006, allowing the City to fill in the excavation because it amounted to a nuisance. The City did so and added the cost, over $500,000, to the tax bill for the property.

The mortgage went into default in or around 2007 and Hercules began sale proceedings in 2009. In July 2010, Hercules entered into an agreement of purchase and sale with Farhi Holdings ("Farhi"). One week before closing, Farhi sent a requisition letter indicating that Hercules had not complied with 13 development agreements with the City of Windsor that were registered on title and complained of an encroachment extending from one property onto the other. Farhi refused to close as no satisfactory response was made to these requisitions.

[3] Claims Against Stewart

Hercules made claims against Stewart related to:

1. The cost of filling in the excavation, added to the tax bill for the property;
2. The development agreements registered against the title; and
3. The encroachment.

The motion judge rejected all the claims on many different grounds. The appellant submits that the motion judge erred in rejecting each of these claims.

A. The Motion Judge's Decision

(1) The Excavation

Dealing first with the cost of filling in the excavation, the motion judge characterized the March 22, 2006 court order as a "work order", consistent with the position taken by Hercules on the motion. The language of the Commercial Lender Endorsement required that the "work order" be outstanding as of the Policy date for there to be coverage. The motion judge held that because the "work order" was not outstanding on the date of the Policy, there was no coverage.

After rejecting other arguments that the claim was also covered under other parts of the Policy related to fire safety regulations and zoning, the motion judge concluded that the claim was also excluded by s. 3(b) of the Policy which provided that there was no coverage for matters,

… not known to the Company [Stewart], not registered in the public records at the date of the Policy, but known to the insured claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the insured claimant became an insured under this policy.

The motion judge also concluded that the Policy excluded coverage for "taxes not shown as existing as of the policy date," and that the costs of filling the excavation, added to the tax bill for the property after the date of the Policy, were therefore excluded.

Schedule B of the Policy stipulated the following exclusion from coverage:

This policy does not insure against loss or damage (and the Company will not pay costs, legal fees, or expenses) which arise by reason of:

1. Taxes, assessments, levies or betterment charges, which are not shown as existing liens by the public records.

The motion judge held that Stewart had been prejudiced by Hercules's failure to disclose the court application before the mortgage transaction closed. Stewart's evidence was that it would have excluded this matter from coverage, had it been advised of the application.

Section 5 of the Policy required timely disclosure by the insured of problems, failing which Stewart could deny coverage if it had been prejudiced:

… a proof or loss or damage signed and sworn to by the insured claimant shall be furnished to the Company within 90 days after the insured claimant shall ascertain the facts giving rise to the loss or damage … If the Company is prejudiced by the failure of the insured claimant to provide the required proof of loss or damage, the Company's obligations to the insured under the policy shall terminate…

Hercules waited some five years before it advised Stewart of the bylaw infraction and the court application by the City.

(2) The Development Agreements and the Encroachment

The motion judge also rejected the claims for coverage related to the development agreements and the encroachments on the ground that these matters had no impact on the value of the property. Actual loss was required to sustain a claim under the language of the Policy. Farhi refused to close the sale for $1.9 million in September 2010, but it purchased the property in 2012 for $2.3 million, expressly accepting the development agreements and the encroachment. The motion judge noted, at para. 50 of his reasons:

Under condition 7 (iii) of the Policy, the liability of Stewart Title is not to exceed the least of certain amounts including the "difference between the value of the uninsured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against the policy". Thus, loss is measured by the difference in value of the real estate without the defect and the value with the defect, such that any diminution in value constitutes damages. In a case of a commercial lender policy, the measure of damages is the difference between the market value of the mortgage without any defect on title and the market value of the mortgage with the title imperfection. (See National Titles Inc. Co. v. Safeco Title Ins. Co., 661 So. (2d) 1234 (Fla. Dist. Ct. App., 1995) at p. 1236).

There being no evidence of any loss, the motion judge concluded that there was no viable claim against Stewart.

The motion judge went on to conclude that Farhi refused to close the sale because it was concerned about the flight of tenants from the office building, not because of the development agreements or the encroachment. In any event, he held that the development agreements only restricted the use of the property and did not go to title.

The motion judge stated that coverage was excluded under the Policy because Hercules had "assumed or agreed to the development agreements."

Section 3 of the Policy excluded coverage for "[d]efects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed or agreed to by the insured claimant."

The motion judge held that there was no evidence of any actual encroachment and, therefore, Farhi had no basis to refuse to close the transaction because of the encroachments. He held that an unjustified refusal to close the transaction did not make title unmarketable, which was a prerequisite to coverage.

The motion judge held that the absence of any loss, as defined by the Policy was also fatal to the claims related to the encroachment.

He held that Hercules's failure to notify Stewart of the problems at the time of Farhi's requisition letter caused actual prejudice to Stewart as it had been denied an opportunity to remedy the problem.

Hercules did not give Stewart notice of a potential claim until December 2010. It appears that the same lawyer had acted for the borrower and Hercules.

B. Standard of Review

To the extent this appeal involves the interpretation of a standard form contract, with no factual basis specific to the parties to assist in its interpretation, its interpretation has precedential value and the standard of review is correctness: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 at para. 46.

On the other hand, in the application of his interpretation to the particular facts before him, the motion judge's findings of fact are entitled to deference: Ledcor at para. 36; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 10.

C. Analysis

Interpretation of the policy here, a standard form contract, may have unforeseeable consequences that go beyond the interests of the parties to this appeal: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at paras. 39-40. For this reason, we do not find it necessary to consider all the grounds given by the motion judge for dismissing Hercules's claim.

It suffices to say that the decision of the motion judge can be affirmed on two bases. First, in relation to the costs of filling the excavation that were added to the tax bill for the property, coverage was excluded under s. 3(b) of the Policy as it was a matter,

… not known to the Company [Stewart], not registered in the public records at the date of the Policy, but known to the insured claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the insured claimant became an insured under this policy.

To be specific, the application by the City was a matter:

1. Not known to Stewart on the date of the Policy;
2. Not registered in the public records that a normal title search would disclose;[1]
3. Known to Hercules before the mortgage transaction closed; and
4. Not disclosed to Stewart.

We need not consider whether the court order was a "work order" within the meaning of the Policy or whether the addition of the cost of filling the excavation to the tax bill changed the character of the cost of compliance into a tax bill not covered by the Policy.

Second, the motion judge's conclusions that the development agreements and the encroachment did not cause any loss or damage were findings open to him on the evidence. This was a sufficient basis to conclude that Stewart was not obliged to indemnify Hercules. We need not explore further whether the motion judge was correct in his other findings and interpretations of the Policy, for example, that the development agreements did not go to title, that Hercules had assumed the development agreements, that the requisition letter from Farhi did not substantiate the existence of the encroachment and that there was no coverage for an alleged encroachment.

The motion judge's finding that Hercules's failure to give notice to Stewart caused actual prejudice to Stewart was also well supported by the evidence.

As a cautionary note, we observe that residential title insurance policies may be quite different from commercial lender title insurance policies. The scope of coverage and exclusions may not be the same and jurisprudence applicable to one does not necessarily translate to the other.

D. Disposition

For these reasons, the appeal is dismissed, with costs to the respondent fixed at $16,000 inclusive of taxes and disbursements.

"G.R. Strathy C.J.O."

"E.E. Gillese J.A."

"G. Pardu J.A."

[1] There was reference to a completed work order in documentation provided by the City, but there was no evidence this related to the same matter as the court order.