Court of Appeal for Ontario

Date: July 12, 2019 Docket: C65634

Judges: Lauwers, Fairburn and Nordheimer JJ.A.

Between

John Bernard Breen Plaintiff (Respondent)

and

FCT Insurance Company Ltd. Defendant (Appellant)

Counsel

Andrew Faith, Jeffrey Haylock and Emma Carver, for the appellant

David Morin and Peter Reinitzer, for the respondent

Heard

June 14, 2019

On Appeal

On appeal from the order of Justice Margaret Eberhard of the Superior Court of Justice, dated June 14, 2018, with reasons reported at 2018 ONSC 3644.

Nordheimer J.A.

Introduction

[1] The appellant, FCT Insurance Company Ltd., appeals from the judgment declaring FCT responsible for certain losses sustained by the respondent, John Breen, in relation to a property for which he had obtained title insurance with FCT.

Background

[2] This case involves a cottage property located in the Muskoka area of Ontario in the Township of Lake of Bays. Construction of the cottage began in October 1989 under the authority of a building permit issued by the Township. During the cottage's construction, the Township's Chief Building Official performed three inspections, on August 17, 1990 and June 3 and 12, 1991. He did not find any fault with the construction. In his last two reports, he wrote that construction had reached the stage at which the building was "ready for drywall".

[3] On January 28, 1992, the Township's Chief Building Official wrote to the owner of the cottage, stating that no inspection had been requested for over six months and that, if the owner did not reply to the letter by February 14, 1992, the Township would assume the project was complete and close its files. Almost a year and a half later, on June 15, 1993, the Chief Building Official wrote to the owner again (the "1993 Letter"), indicating that the Township considered construction to be complete, that the Township would advise the Assessment Commissioner to add the property to the tax roll, and that the Township had closed its file on the permit.

[4] Mr. Breen purchased the property under power of sale in 1999. Before the purchase closed, the Breens' conveyancing solicitor had written to Mrs. Breen (the intended purchaser at the time), on March 4, 1999, to advise of the results of a building department search. The conveyancing solicitor stated:

The Building Department for the Township of Lake of Bays have advised us as follows:

1. A Building Permit for the cottage was issued in 1989.

2. Inspections with respect to the foundation, drainage and insulation were completed in June, 1991.

3. The Building Department sent a notice in 1992 to the owner indicating that a final inspection of the cottage was outstanding.

4. In 1996, the building Department lost its records in a fire. Due to the fire, no one knows whether the cottage ever passed its final inspection.

The Building Department does not appear to be concerned as to whether or not the cottage had a final inspection. I am inclined to leave things as is and not request that the Building Department conduct a final inspection of the cottage prior to closing. If you disagree with my suggestion, please call me.

[5] The Breens accepted their conveyancing solicitor's advice and did not request a final inspection. Before the March 15, 1999 closing, Mr. Breen, who had been substituted as the purchaser of the cottage for Mrs. Breen, obtained a title insurance policy (the "Policy") from FCT for a premium of $347, again on the advice of the Breens' conveyancing solicitor.

[6] Approximately 10 years after acquiring the cottage, in 2011, the Breens decided to renovate the kitchen. In the course of preparing for the renovation, their contractor opened up a wall and identified violations under the Building Code Act, 1992, S.O. 1992, c. 23. An engineer was then retained. The engineer's inspection identified "several significant structural issues that need to be dealt with". The Breens were advised that the cost of repairing these issues might be prohibitive. Indeed, their contractor and the engineer advised that "a complete rebuild will be an option you'll need to consider". The engineer also warned the Breens not to occupy the cottage. The Breens heeded that advice and stopped using the cottage in 2012, about 13 years after its purchase. The cottage has not been used since.

[7] On February 26, 2014, Mrs. Breen sent a notice of claim to FCT. On March 3, 2014, FCT initially confirmed coverage, on the understanding that there was an open building permit on the Property, but it reserved the right to change its decision should further facts emerge. That occurred. On May 21, 2014, FCT denied coverage because it had learned that there was no open building permit, and that, instead, the Township has closed its file on the permit.

[8] Two actions have been commenced resulting from these facts. The first action, which was commenced on February 18, 2014, is a claim by the Breens in negligence against the Township. The second action, commenced on March 17, 2015 and giving rise to this appeal, is a claim by Mr. Breen against FCT under the Policy.

The Decision Below

[9] The trial judge began her analysis by stating that any finding of coverage under the Policy turned on whether the principles enunciated by this court in MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663 applied. The trial judge then considered the terms of the Policy and how those terms compared to the terms of the title insurance policy that was at issue in MacDonald.

[10] The trial judge found, like the situation in MacDonald, that there was no work order that Mr. Breen could have discovered when he purchased the cottage in 1999. The trial judge concluded that the defects in the cottage were latent defects. She then held, at para. 46:

It has taken the investigations in this law suit to uncover the inadequacy of the Building Permit process, and subsequent futility of inspection by a Building Inspector to detect design problems which must be designed and inspected by an engineer, and insufficient inspection to justify an assumption that the building was complete.

[11] While recognizing that a finding of coverage in these circumstances might be "an unexpected extension of what is understood to be a title defect", the trial judge considered the decision in MacDonald as binding on her. She interpreted MacDonald as instructing her to take a broad approach to the interpretation of the coverage provisions: at para. 47. The trial judge concluded that the differences in the defects between the two cases were ones of "detail, not of kind": at para. 48. Relying on MacDonald, the trial judge found that the factual situation here fell within the coverage offered by the Policy for unmarketable title. The trial judge said, at para. 51:

I find that the structural defects which flow directly from the inadequacy of the Building Permit process, and subsequent futility of inspection by a Building Inspector to detect design problems which must be designed and inspected by an engineer, and insufficient inspection to justify an assumption that the building was complete, resulted in the dangerous condition of the property which has made the Plaintiff's title unmarketable.

[12] The trial judge went on to consider the exclusions under the Policy and found that none of them applied to the situation in this case. In particular, she found that Exclusion #1 – which excluded coverage for losses arising from the existence or violation of any law, by-law, order, code or government regulation, unless the violation or enforcement of such matters appeared in "Public Records" as at the policy date – did not apply because it was too broad and/or vague and consequently should be given a narrow interpretation. She also observed that this court had not said in MacDonald that such an exclusion could be applied to title risk of unmarketability: at paras. 64-69.

[13] The trial judge also considered Exclusion #3, which excludes coverage for title risks actually known to the purchaser. The trial judge concluded that this exclusion did not apply because, while Mr. Breen's solicitor knew about the 1993 Letter, there was nothing that would have caused the solicitor to do any further investigation into the matter: at paras. 115-121.

[14] Finally, the trial judge rejected FCT's argument that counsel for Mr. Breen had changed the basis for his claim during closing submissions. More specifically, FCT had submitted that the basis on which Mr. Breen sought relief in his closing submissions, and on which the trial judge found liability, was not pleaded in Mr. Breen's amended statement of claim. In rejecting that argument, the trial judge found that FCT "strategically wore blinders", that it was aware of the issues and simply chose not to address them through evidence: at paras. 84-106.

[15] Consequently, the trial judge found that Mr. Breen was entitled to coverage under the Policy for the losses arising from the defects in the cottage.

Analysis

[16] In my view, the trial judge erred in her conclusion regarding the Policy and whether it covered this situation.

[17] The standard of review applicable to the interpretation of a standard form policy of insurance is correctness: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 4. Applying this standard of review, I find that the trial judge erred in failing to recognize significant distinctions between the facts in this case and those in MacDonald.

[18] In my view, in applying the decision in MacDonald, one has to be careful to recognize what the court did, and did not, decide in that case. One also has to be cognizant of the specific facts that led to the conclusion that there was coverage under the title insurance policy in that case.

[19] There are two fundamental differences between this case and MacDonald. First is the fact that Mr. Breen was on notice at the time of purchase of a potential problem with the building permit process and the inspections (or lack thereof) when the cottage was constructed. Central to the conclusion in MacDonald was the fact that there was no reason for the purchasers, or their conveyancing solicitor, to know that construction (more accurately demolition) had been undertaken without a building permit. Consequently, there was no reason for the conveyancing solicitor to make any inquiries in that regard.

[20] Here, the conveyancing solicitor knew that the cottage had been constructed pursuant to a building permit issued by the Township. The conveyancing solicitor also knew that there had been some inspections of the construction but no evidence that a final inspection had been conducted. Indeed, the conveyancing solicitor advised Mrs. Breen that they could ask the Township to conduct a final inspection prior to completing the purchase, but the solicitor thought it better to let matters lie as they were.

[21] The second distinguishing fact is that in MacDonald, had the conveyancing solicitor known of the demolition of load bearing walls and conducted a further investigation (i.e., an "off-title" search for a building permit), the solicitor would have discovered that no building permit existed. That would then have alerted the solicitor to the fact that the demolition was done illegally. Those are the critical facts that turned the matter into a title issue in MacDonald. As Hourigan J.A. said in MacDonald, at para. 74:

The dangerous condition of the property, therefore, flows directly from the failure of the previous owner to attempt to obtain the necessary municipal approval. That failure has made the appellants' title unmarketable within the meaning of clause 11 of the title policy.

[22] In this case, however, the evidence is that, even if a final inspection had been conducted, that inspection would not have revealed the construction defects because those defects were hidden behind the walls of the cottage that were already constructed (and which had apparently already passed inspection). Therefore, had Mr. Breen insisted that the Township conduct a final inspection before the purchase was completed, that inspection would not have revealed the defects. The defects would not then be an issue regarding the marketability of the title, even under the broad meaning given to that term in MacDonald.

[23] Further, the off-title search that Mr. Breen's conveyancing solicitor did conduct revealed that there was a building permit for the construction of the cottage (unlike the situation in MacDonald). That off-title search not only would not have revealed the construction defects, but also would not have revealed any of the other deficiencies that Mr. Breen alleges were associated with the handling of the building permit by the Township, and the construction undertaken pursuant to that building permit. The purpose of title insurance is to protect against what off-title searches would reveal – and obviate the need for exhaustive and costly off-title searching – not to protect against defects that would not be revealed by such searches.

[24] On this point, it is also important to know that the Policy in this case draws a very clear distinction between situations where the land is unmarketable and where the title is unmarketable. Each of those situations is described in the Policy in terms of what is covered and what is not. The situation facing Mr. Breen in this case is much more akin to an issue with the marketability of the land than it is with the marketability of the title. I note that this same distinction was drawn by this court in Fischer v. Stewart Title Guaranty Co., 2014 ONCA 798 in denying a claim under a title insurance policy. I would add that, if I assume that the situation here leads to the land being unmarketable, unfortunately for Mr. Breen, the cause of the unmarketability of the land is not one of the causes for which coverage is provided under the Policy.

[25] For these reasons, in my view, the trial judge erred in applying MacDonald to this case and she erred in concluding that the situation here was covered by the unmarketability of title provision in the Policy.

[26] Given that conclusion, it is not necessary to address the issue of whether either of the two exclusions adverted to by the trial judge apply. Nevertheless, I will address the exclusions briefly. It is unnecessary to get into an analysis of the wording of Exclusion #1 other than to note that the trial judge's observation that the wording appears to very broad was one that was open to her. That fact, coupled with the fact that exclusion provisions are to be construed narrowly, would appear to pose an obstacle for FCT's attempted reliance on that exclusion. I must add, though, that the trial judge erred in drawing from MacDonald support for her conclusion that Exclusion #1 would not apply to this situation since the application of Exclusion #1 was not actually addressed in MacDonald.

[27] It is difficult to see, however, how Exclusion #3 does not capture this situation, even if the coverage provisions of the Policy would otherwise cover it. Exclusion #3 expressly provides that no coverage is provided for title risks "that are actually known to you, but not to us, on the Policy Date – unless they appear in the Public Records". Public Records are defined as "records established and maintained under the Registry Act and Land Titles Act".

[28] As will be seen from my analysis above, the title risk for which Mr. Breen claims coverage in this case – namely, the alleged failings by the Township in the building permit process – was known to him. Mr. Breen's conveyancing solicitor expressly recognized the issue and provided advice on it. Further, the information that gives rise to that knowledge is not information coming from records established and maintained under either of the two statutes mentioned in the definition of "Public Records".

[29] Consequently, had I otherwise concluded that the defects in the construction of the cottage were caught by the provision providing coverage for unmarketable title, I would have found that the coverage was excluded by Exclusion #3.

[30] Given my conclusions on this matter, it is not necessary to address the issue of whether the trial judge was correct in finding that the basis for liability was properly and adequately pleaded. I will say, though, that the trial judge's apparent criticism of trial counsel on this point does not appear to be justified. There was an arguable basis for counsel's concerns regarding the scope of the amended statement of claim.

Conclusion

[31] The appeal is allowed, the judgment is set aside, and Mr. Breen's claim is dismissed. FCT is entitled to its costs of the appeal fixed in the agreed amount of $25,000, inclusive of disbursements and HST. The panel was advised that counsel had worked out an agreement with respect to the costs of the action so I do not need to address those costs.

Released: July 12, 2019

I.V.B. Nordheimer J.A.

I agree. P. Lauwers J.A.

I agree. Fairburn J.A.