Nodel v. Stewart Title Guaranty Company

[Indexed as: Nodel v. Stewart Title Guaranty Co.]

Ontario Reports

Ontario Superior Court of Justice,

Matheson J.

February 8, 2017

136 O.R. (3d) 676 | 2017 ONSC 890

Case Summary

Insurance — Title insurance — Interpretation — Title insurance policy providing coverage for mortgage fraud but containing exception which removed coverage where proceeds of insured mortgage were paid to any person or entity other than registered titleholder — Exception not applying where payment was made to titleholder's lawyer in trust for his client.

A title insurance policy provided coverage for mortgage fraud, but contained an exception which removed coverage if the proceeds of the insured mortgage were "paid to any person or entity other than (i) the registered title holder". Acting in accordance with a direction from the borrower, the lender's lawyer paid the mortgage proceeds to the borrower's lawyer, in trust for the borrower. It turned out that the mortgage was procured through identity fraud. The insurer took the position that the exception applied and denied coverage. The lender brought an application for a declaration that the title insurance policy provided coverage.

Held, the application should be allowed.

The exception did not clearly and unambiguously provide that the moneys would be "paid to" the registered titleholder only if the cheque was made out to the titleholder or the proceeds were wired to the titleholder's bank account directly. The ambiguity should be construed against the insurer. The exception did not apply. [page677]

Cases referred to

Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74, 127 D.L.R. (4th) 618, 186 N.R. 150, [1995] 9 W.W.R. 305, 63 B.C.A.C. 1, 10 B.C.L.R. (3d) 1, 31 C.C.L.I. (2d) 1, [1995] I.L.R. 1-3232, 13 M.V.R. (3d) 302, 57 A.C.W.S. (3d) 640, 1995 CarswellBC 424; Cabell v. Personal Insurance Co. (2011), 104 O.R. (3d) 709, [2011] O.J. No. 622, 2011 ONCA 105, 278 O.A.C. 51, 331 D.L.R. (4th) 460, [2011] I.L.R. I-5117, 93 C.C.L.I. (4th) 28, 199 A.C.W.S. (3d) 1293; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37, [2016] 10 W.W.R. 419, [2016] I.L.R. I-5917, 54 B.L.R. (5th) 1, 59 C.C.L.I. (5th) 173, 487 N.R. 1, 56 C.L.R. (4th) 1, 404 D.L.R. (4th) 258, 2016EXP-2930, J.E. 2016-1579, EYB 2016-270368, 269 A.C.W.S. (3d) 753; MacDonald v. Chicago Title Insurance Co. of Canada (2015), 127 O.R. (3d) 663, [2015] O.J. No. 6350, 2015 ONCA 842, 341 O.A.C. 299, [2016] I.L.R. I-5826, 61 R.P.R. (5th) 1, 392 D.L.R. (4th) 463, 56 C.C.L.I. (5th) 267, 52 B.L.R. (5th) 26, 260 A.C.W.S. (3d) 402 [Leave to appeal to S.C.C. refused [2016] S.C.C.A. No. 39]; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, 2010 SCC 33, 293 B.C.A.C. 1, [2010] I.L.R. I-5051, 406 N.R. 182, 323 D.L.R. (4th) 513, 9 B.C.L.R. (5th) 1, EYB 2010-179515, 93 C.L.R. (3d) 1, 2010EXP-3049, J.E. 2010-1683, [2010] 10 W.W.R. 573, 73 B.L.R. (4th) 163, 89 C.C.L.I. (4th) 161, 193 A.C.W.S. (3d) 1292; Sam's Auto Wrecking Co. (c.o.b. Wentworth Metal) v. Lombard General Insurance Co. of Canada (2013), 114 O.R. (3d) 730, [2013] O.J. No. 1413, 2013 ONCA 186, 305 O.A.C. 68, 361 D.L.R. (4th) 336, 20 C.C.L.I. (5th) 173, 225 A.C.W.S. (3d) 1111; Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 2014EXP-2369, J.E. 2014-1345, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1, 242 A.C.W.S. (3d) 266

Statutes referred to

Land Titles Act, R.S.O. 1990, c. L.5 [as am.]

Law Society Act, R.S.O. 1990, c. L.8, s. 62(0.1) [as am.], (1) [as am.]

Authorities referred to

Law Society of Upper Canada, By-law 7.1

APPLICATION for a declaration that the title insurance policy provided coverage for the insured's losses.

Gavin J. Tighe and Alexander Melfi, for applicant.

Mark Veneziano and Danielle Glatt, for respondent.

[1] MATHESON J.: — The applicant challenges Stewart Title's interpretation of a standard clause in its title insurance for private lenders, and seeks a declaration that the title insurance policy provides coverage for the losses incurred. The title insurance was obtained for a private mortgage that, as it turned out, was procured through identity fraud.

[2] Stewart Title agrees that it insured for fraud but has denied coverage based upon an exception to the coverage. It is that exception that is the focus of this application. In short, the [page678] exception was invoked because the funds were disbursed to the borrower's lawyer in trust for his client, rather than to the borrower directly. I conclude that the exception does not exclude coverage where payment is made to the lawyer in trust for his or her client.

Events Giving Rise to Application

[3] In June 2014, the applicant was contacted by a mortgage broker regarding a potential private mortgage loan transaction. The borrower was John Colarieti, who was seeking a one-year loan in the principal amount of $1.1 million. The purpose of the loan was for investment; it was not a refinance transaction. The proposed security was a second mortgage registered against his property, municipally known as 88 Edenbridge Dr., Toronto (the "property").

[4] The applicant executed a mortgage commitment letter dated June 23, 2014. He also retained a real estate lawyer, Isaac Singer, to act on his behalf as the lender in the mortgage transaction. Mr. Singer had been retained by the applicant on prior mortgage lending transactions.

[5] The real estate lawyer acting for Mr. Colarieti was Bryan Dale. Mr. Singer wrote to Mr. Dale requesting information that was required to complete the transaction, including, among other things, photo identification for Mr. Colarieti.

[6] On or around June 23, 2014, the applicant instructed Mr. Singer to apply for and obtain title insurance for the mortgage on the property to protect his investment from fraud. Mr. Singer applied for title insurance from Stewart Title, on behalf of his client.

[7] Stewart Title flagged the application for review because the borrower's lawyer -- Mr. Dale -- was on a "flash list" of real estate lawyers and had a prior disciplinary history with the Law Society of Upper Canada.

[8] On July 2, 2014, Stewart Title contacted Mr. Singer to advise that it had flagged the mortgage transaction for review, and it requested documents and information with respect to the transaction in order to confirm whether the transaction could proceed as title insured. Stewart Title did not disclose the reason it had flagged the transaction then or at any time prior to the closing of the mortgage transaction. However, its July 2 letter to Mr. Singer stated as follows:

If we do allow the transaction to be title insured and we clear the flag, you can rest assured that the concerns we had are not present on this transaction. [page679]

[9] Mr. Singer promptly responded to Stewart Title's request for documents and information, as well as to a second request for documents from Stewart Title.

[10] Unbeknownst to Mr. Singer and the applicant, Stewart Title conducted its own independent investigation of the mortgage transaction due to its concerns about fraud. Among other things, Stewart Title conducted a check on the borrower, Mr. Colarieti. His driver's licence was checked. Validity was confirmed. His social insurance number was also checked and confirmed.

[11] Stewart Title then e-mailed Mr. Singer's office on July 3, 2014 and confirmed that the "flag" on the mortgage transaction had been cleared. On that day, Stewart Title approved the issuance of a title insurance policy to the applicant, described below.

[12] On the same day, the borrower's lawyer provided Mr. Singer with the executed closing documents, including a certification from the borrower's lawyer that the individual who appeared before him and executed the mortgage transaction documents was the individual he purported to be.

[13] With respect to a direction for the disbursement of the funds, Mr. Singer received an executed direction on July 2, 2014, directing that the mortgage proceeds were to be disbursed to borrower's lawyer, in trust, or as the borrower's lawyer may further direct in writing. Mr. Singer's office had provided that form of direction among other draft documents sent to the borrower's lawyer.

[14] There was no further direction provided to Mr. Singer. He was not redirected to pay the mortgage proceeds to a third party.

[15] The movement of funds was as follows: the sum of $1,089,000 (the mortgage principal less fees and expenses) was wired to Mr. Singer's trust account; in turn, the amount of $1,053,853.62 was disbursed to the borrower's lawyer, in trust for Mr. Colarieti.

[16] Mr. Singer had no information that the mortgage proceeds were being paid to anyone other than the borrower. Indeed, the funds summary sent by Mr. Singer to the borrower's lawyer, which showed a breakdown of how the mortgage proceeds were applied, indicated that the amount transferred to the borrower's lawyer was to be "paid to client following closing".

[17] On July 3, 2014, Mr. Singer registered the charge/ mortgage against the property.

[18] The fraud was then discovered. On July 22, 2014, Mr. Singer received a telephone call from Mr. Dale, expressing his concern that the mortgage transaction was fraudulent. The matter was reported to the York Regional Police. [page680]

[19] At that time, Mr. Singer also learned for the first time that Mr. Dale had disbursed the mortgage proceeds from his trust account to third parties, not to Mr. Colarieti.

[20] It is not disputed that the mortgage was fraudulent and that the director of titles has since determined that the charge/mortgage instrument was a fraudulent instrument within the meaning of the Land Titles Act, R.S.O. 1990, c. L.5. The instrument has therefore been ordered to be deleted from the title to the property and is unenforceable.

[21] The applicant made a claim under the policy. On September 26, 2014, Stewart Title acknowledged that the claim was with respect to mortgage fraud, but denied coverage, relying on para. 2 of Schedule B of the policy.

Insurance Policy

[22] Stewart Title issued a "Gold Policy" in favour of the applicant, specifically Policy No. M-7764 3549657. The policy begins as follows:

GOLD POLICY

"GOLD" COMPREHENSIVE PROTECTION LOAN POLICY

ONE-TO-SIX FAMILY RESIDENCES ISSUED BY

STEWART TITLE

GUARANTY COMPANY

LENDER'S COVERAGE STATEMENT

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, STEWART TITLE GUARANTY COMPANY . . . insures . . . against loss or damage, not exceeding one hundred twenty-five percent (125%) of the Amount of Insurance stated in Schedule A, sustained or incurred by the Insured by reason of: . . .

5. The invalidity or unenforceability of the Insured Mortgage upon the Title[.]

(Emphasis added)

[23] As shown by this coverage provision, the policy provides coverage for mortgage fraud. This is not disputed. However, Stewart Title relies upon an exception to coverage contained in Schedule B, as follows:

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; ii) holder(s) of prior registered encumbrance(s); iii) an execution or judgment creditor(s); iv) to a non-registered covenantor that is a spouse, child or [page681] parent of the registered title holder or holders; v) to credit card companies for credit cards in the name of the registered title holder or holders or in the name of non-registered covenantor(s) that are the spouse, child or parent of the registered title holder or holders; 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, including challenges to the validity and enforceability of the Insured Mortgage. For the purpose of this exception clause, "proceeds of the Insured Mortgage" is deemed to be the amount of the Insured Mortgage available for disbursement to the registered title holder or holders after the payment, with respect to the property being insured, of outstanding realty taxes or utilities, condominium/strata fees, homeowner's association fees, insurance fees, and/or the payment of legal fees (including disbursements), mortgage broker/realtor fees/commissions arising out of the insured transaction[.]

(Emphasis added)

[24] This exception removes coverage if the proceeds are not paid to one of the listed parties. Subparagraph (i) is the relevant listed party here -- the registered titleholder, who is also the borrower in this case. The funds were disbursed to the registered titleholder/borrower's lawyer, in trust for the registered titleholder/borrower. Stewart Title denied coverage.

Evidence about the Application Process and Communications to Counsel

[25] Stewart Title has put forward evidence about its application process and communications with counsel regarding its fraud mitigation questions. The application before me is not a challenge to the enforceability of the policy. Stewart Title seeks to rely on this background in response to the applicant's alternative request for relief from forfeiture and to some extent in regard to interpretation of the policy.

[26] Stewart Title has a process through which lawyers must apply for and receive an appointment in order to have access to the online application system. Mr. Singer received such an appointment. The affiant for Stewart Title attests that it relies on counsel to accurately answer the questions posed in the application process, and that Stewart Title retains the right to decline to issue a title insurance policy.

[27] As part of the policy application process, Mr. Singer answered this question:

Are the mortgage proceeds being paid to anyone OTHER than an existing lender or the borrower directly?

(Underlining emphasis added)

[28] Obviously, the above question uses wording different from the wording in the policy itself. The word "directly" does not appear in the exception relied upon in the policy. [page682]

[29] Mr. Singer answered no. If Mr. Singer had answered yes to this question, he would have been asked follow-up questions including a request "to indicate to whom the mortgage funds were being made payable".

[30] Stewart Title also puts forward a bulletin from July 2006 that it distributed to its appointed counsel. That bulletin provided instructions to appointed counsel about how to answer the fraud mitigation questions, including the above question. In that regard, the bulletin quoted the question and provided instructions in parentheses, as follows:

Are the mortgage proceeds being paid to anyone other than an existing lender or to the borrower directly? (Answer YES, if the payment is to a lawyer in trust) (For refinances only)

(Underlining emphasis added)

[31] Again, the question includes the word "directly" where the policy does not. As well, the instruction to answer yes where the payment is to a lawyer in trust is for refinances only. The transaction at issue here was not a refinance.

[32] Further bulletins were sent to appointed counsel, including a 2014 bulletin announcing the Schedule B exception relied upon in this application. Again, this bulletin refers to payment "directly":

From time to time, Stewart Title will review its fraud claim files to determine if there are fact patterns that may be indicators of fraud. Such reviews have revealed that private lender mortgage transactions have a significantly higher risk of being fraudulent than institutional lender transactions. In addition, the risk increases when the mortgage proceeds are not paid from the lawyer's trust account to the registered title holder(s) directly. We believe that it is a reasonable expectation that private lenders instruct and verify that lawyers do not pay the balance of the mortgage proceeds to persons or entities other than the registered title holder(s) and/or prior registered encumbrances and/or execution/judgment creditors.

In the case of a purchase transaction, we presume that the funds will be paid to the registered title holder when the vendor or vendor's lawyer is receiving the funds directly from the purchaser's/borrower's lawyer.

(Underlining emphasis added)

[33] The above-stated presumption, albeit stated in the context of a purchase transaction, is inconsistent with an intention to disqualify payments to a lawyer.

[34] As well, the bulletin said the following about directions:

When you are ordering a loan policy for a private lender, we strongly advise that you ensure the funds are being directed appropriately and, in the event that you are receiving instructions to direct funds to persons or entities with [page683] no apparent relationship to the transaction, you inform the lender and Stewart Title prior to advancing any funds.

(Emphasis added)

[35] A direction to pay third parties with no relationship to the transaction is a flag of fraud. However, Mr. Singer did not receive instructions to direct funds to persons or entities with no apparent relationship to the transaction.

[36] Mr. Singer conceded in cross-examination that when he made the application for title insurance, he did not know to whom the proceeds were going to be paid. He nonetheless answered no to the question: Are the mortgage proceeds being paid to anyone other than an existing lender or to the borrower directly? However, the expected direction was provided, and in accordance with the direction, the mortgage funds were disbursed to Mr. Dale, in trust.

[37] Mr. Singer attested on this application that transferring funds to the other side's lawyer in trust was a common practice. The respondent's affiant agreed with this evidence in cross-examination, although she would not agree with the extent of the practice. She said it "definitely does occur. I can't say if it is 50 percent or 80 percent."

[38] Stewart Title's affiant agreed that the practice was common enough that the clarifying instruction was given in the July 2006 bulletin specifically referring to payments to lawyers in trust. Again, that 2006 bulletin instructed appointed counsel to answer yes if the payment was to a lawyer in trust -- for refinances only.

[39] Stewart Title also put forward various Law Society publications on the subject of mortgage fraud. Those publications consistently warn that it is a "red flag" of fraud if a lawyer receives instructions to pay proceeds to third parties not related to the transaction. However, Mr. Singer received no such instructions. It was Mr. Dale who received those instructions.

Civil Litigation

[40] Given the loss on the mortgage transaction, the applicant commenced a civil action. Among other things, he sued Mr. Singer, who commenced a third party claim against Stewart Title.

[41] The action was settled except with respect to Stewart Title. The claim for coverage under the policy was assigned to LawPRO. LawPRO and Stewart Title agreed that the determination of the claim for coverage would proceed by way application. This application was then commenced. [page684]

Analysis

[42] The primary issue in this application is the interpretation of the exception relied upon to deny coverage. The other issue is the applicant's request, in the alternative, for relief from forfeiture.

Interpretation of Insurance Policies

[43] The principles that apply to the interpretation of an insurance policy are well settled:

(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 exclusion provisions narrowly.

Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, 2010 SCC 33, at paras. 22-24; MacDonald v. Chicago Title Insurance Co. of Canada (2015), 127 O.R. (3d) 663, [2015] O.J. No. 6350, 2015 ONCA 842, at para. 66, leave to appeal to S.C.C. dismissed [2016] S.C.C.A. No. 39; Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74, 1995 CarswellBC 424, at para. 19; Sam's Auto Wrecking Co. (c.o.b. Wentworth Metal) v. Lombard General Insurance of Canada (2013), 114 O.R. (3d) 730, [2013] O.J. No. 1413, 2013 ONCA 186, at para. 37.

[44] A clause that nullifies coverage will not be enforced. An interpretation that would nullify coverage altogether should be avoided: Sam's Auto Wrecking Co., at para. 37; MacDonald, at para. 66; Amos, at para. 19; Cabell v. Personal Insurance Co. (2011), 104 O.R. (3d) 709, [2011] O.J. No. 622, 2011 ONCA 105, at paras. 14-17.

[45] Surrounding circumstances may be taken into account in interpreting the contract if the circumstances are objective background that were or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: [page685] Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, at paras. 50, 58.

[46] The factual matrix is less relevant for standard form contracts because the terms are not negotiated: "the contract is put to the receiving party as a take-it-or-leave-it proposition": Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37, at para. 28. However, factors such as the purpose of the contract and the industry in which it operates should still be considered: Ledcor, at para. 31, citing Sattva.

[47] There is no dispute that the purpose of the title insurance policy at issue here was to provide insurance for mortgage fraud, among other things. This is agreed. The express words of the policy provide coverage for loss or damage sustained or incurred by the insured by reason of the invalidity or unenforceability of the insured mortgage upon the title.

[48] The issue here is the proper interpretation of the exception to coverage relied upon by Stewart Title.

Exception at Issue

[49] The exception relied upon is as follows (reformatted for readability):

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;

ii) holder(s) of prior registered encumbrance(s);

iii) an execution or judgment creditor(s);

iv) to a non-registered covenantor that is a spouse, child or parent of the registered title holder or holders;

v) to credit card companies for credit cards in the name of the registered title holder or holders or in the name of non-registered covenantor(s) that are the spouse, child or parent of the registered title holder or holders;

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[.]

(Emphasis added)

[50] This exception requires that the proceeds be paid to one or more of a list of approved parties. The relevant approved party is the registered titleholder, subpara. (i), who is also the borrower in this case.

[51] The phrase at issue is the phrase "are paid to any person or entity other than . . . the registered title holder". Stewart Title [page686] submits that the monies "are paid to" the registered titleholder if the cheque is made out to them or wired to their bank account directly. In other words, I am asked to interpret "are paid to" as meaning "made payable to" or "paid directly to" the registered titleholder/borrower.

[52] Essentially, Stewart Title is attempting to limit the different ways a payment can be made, allowing some but not others. As set out below, I do not find that the exception clearly and unambiguously bears Stewart Title's proposed meaning.

[53] The applicant relies on the ordinary proposition that payments to a lawyer, in trust for his or her client, are payments to the client. This is another way to pay the registered titleholder/ borrower. Thus, funds are paid to the registered titleholder/ borrower when they are disbursed to the titleholder/borrower's lawyer, in trust for the titleholder/ borrower. There is an admitted common practice to disburse funds to lawyers, in trust for their client. That is what happened here.

[54] With respect to a payment to the lawyer in trust, Stewart Title's position is that this is acceptable only if that lawyer undertakes to disburse the funds from his or her trust account directly to one of the listed approved parties. This position illustrates the degree to which Stewart Title seeks to read requirements into the language of the exception. Its position is that payment to the lawyer in trust is permitted, but only if this undertaking, nowhere mentioned in the exception or the policy, is obtained.

[55] When funds are paid to a lawyer, in trust for his or her client, the funds are not necessarily received by the client. The client could redirect the funds to someone unrelated to the transaction. However, if "are paid to" means that the funds are actually received by one of the listed approved parties, there would be no coverage for fraud since the exception would require that the funds were properly received. In turn, the exception would be unenforceable since it would nullify coverage for fraud. Accordingly, Stewart Title concedes that receipt by an approved party is not part of the definition of "are paid to".

[56] Thus, one potential meaning -- that "paid" means that a person has received moneys that they are entitled to -- is not put forward here. However, that meaning must be considered in the sense that it shows the ambiguity of the phrase at issue. It is an ordinary usage. But for the insurance company agreeing that this meaning does not apply, the words are capable of bearing this meaning.

[57] It is agreed that "paid" is the past tense of "pay". There are some legal definitions of "pay" collected in Black's Law Dictionary, 10th ed., at p. 1309, as follows: [page687]

1. To give money for a good or service that one buys; to make satisfaction.

2. To transfer money that one owes to a person, company, etc.

3. To give (someone) money for the job that he or she does; to compensate a person for his or her occupation.

4. To give (money) to someone because one has been ordered by a court to do so.

5. To be profitable; to bring in a return.

[58] Stewart Title relies on the second definition of "pay" -- to transfer money that one owes to a person or company. It then submits that "paid" means to disburse or direct moneys to a named person or entity. However, this definition does not address the question of the manner of payment and whether or not the payment must be direct.

[59] Relevant surrounding circumstances support the conclusion that the exception permits payments to a lawyer in trust for his or her client. Both the regulatory regime and the common practice support the applicant's interpretation as reasonable and commercially sensible. And the regulatory regime and common practice are part of the industry in which the insurer operates.

[60] Subject to exceptions to that do not apply, in a mortgage transaction, the borrower and the lender must be represented by separate counsel: Rules of Professional Conduct, rules 3.4-12 to 3.4-14.

[61] Lawyers are prohibited from communicating directly with a person who is represented by counsel: Rules of Professional Conduct, rule 7.2-6. Lawyers are obliged to communicate through counsel, unless there is consent from opposite counsel. There are limited exceptions, which do not apply here: rules 7.2-6A and 7.2-7.

[62] Thus, the lender's lawyer must deal with the borrower's lawyer, who deals with his or her client.

[63] Lawyers are expressly required to fulfil client identification and verification requirements regarding their clients: Law Society Act, R.S.O. 1990, c. L.8, ss. 62(0.1) and (1); Law Society of Upper Canada By-law 7.1, Part III, s. 23(1), Client Identification. These requirements are focused on the prevention of identity fraud. The borrower's lawyer is therefore obliged to fulfil these client identification and verification requirements with respect to his or her client. The borrower's lawyer has direct access to his or her client, which is important to the above verification process. The lender's lawyer does not.

[64] The flow of funds through lawyers' trust accounts is also regulated. Lawyers are only allowed to withdraw funds from [page688] their trust accounts in specified circumstances: LSUC By-law 9, Part IV, s. 9(1). A lawyer may withdraw from a trust account where the money is "properly required for payment to a client or to a person on behalf of a client": s. 9(1) 1. Thus, when Mr. Singer disbursed the funds to borrower's counsel in trust for his client, borrower's counsel was restricted in what could be done with those funds.

[65] These regulatory requirements and the related common practice are objective background that reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Although they are not a guarantee that there can be no fraud, they support an interpretation that allows for payment by paying a lawyer in trust for his or her client.

[66] Stewart Title has put forward an explanation for its position, submitting that it is reasonable and commercially sensible. It submits that if direct payment is required, as it submits it is, the fraudster would have to also fool a bank into opening an account through which a cheque could be cashed or a wire transfer processed. Stewart Title would then benefit from the additional fraud protection steps that the bank would take in its own account-opening process. Those steps would reduce the risk of fraud. I accept that a bank may take steps that would reduce the risk of fraud, to the benefit of Stewart Title. However, this benefit does not determine the meaning of the exception.

[67] The bulletins sent to appointed counsel are not helpful to Stewart Title. The application questions added the word "directly" when asking about payment. The adding of that word is significant. Clear meanings do not require elaboration.

[68] As well, one bulletin provided the following instructions to counsel:

Are the mortgage proceeds being paid to anyone other than an existing lender or to the borrower directly? (Answer YES, if the payment is to a lawyer in trust) (For refinances only)

(Underlining emphasis added)

[69] These instructions not only add the word "directly" but also expressly refer to payments to a lawyer in trust, indicating that such a payment is direct except for refinances. The transaction at issue was not a refinance.

[70] Stewart Title submits that since lawyers may be directed by their clients to disburse funds to parties that are not on the approved list, the intention of the exception will be defeated. However, the insured is not the borrower. It is the borrower who can redirect his or her lawyer to pay the funds to third parties, [page689] as transpired here. Further, in the ordinary course borrowers may legitimately use borrowed funds to pay third parties. It is not necessarily fraud. This argument does not lead to an unambiguous meaning in favour of Stewart Title. At best, it illustrates the ambiguity of the exception.

[71] Given the accepted interpretative rule that ambiguities are construed against the insurer, I conclude that the exception does 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 exception permits multiple payment methods including disbursing the funds to the lawyer, in trust for his or her client.

[72] Given my decision on the main issue, I need not address the applicant's alternative claim for relief from forfeiture.

Conclusion

[73] I therefore declare that the exception relied upon in Schedule B of the policy does not exclude coverage for the loss of mortgage security incurred by the applicant. Stewart Title is therefore obliged to fulfill its obligation to indemnify the applicant for the loss under the policy.

[74] If the parties are unable to agree on costs, the applicant shall make submissions by delivering brief written submissions together with a costs outline by February 28, 2017. Stewart Title may respond by delivering brief written submissions by March 17, 2017. This time table may be modified on agreement between the parties provided that I am notified of the new time table by February 28, 2017.

Application allowed.

End of Document