A recent case from the Ontario Court of Appeal should make all real estate lawyers and their clients think twice about not getting title insurance on home purchases. In 2006, Paul and Stephanie MacDonald purchased a house in Toronto and, with the assistance of their lawyer, purchased a title insurance policy from Chicago Title Insurance Company. In 2013 the MacDonalds discovered that the previous owner had renovated the property without taking out a building permit and specifically had removed some load bearing walls on the 2nd floor of the home. The City of Toronto issued an Order to remedy an unsafe building requiring the MacDonalds to make immediate repairs to temporarily support the 2nd floor. They complied and then made a claim under their title insurance policy to pay for the cost of these repairs as well as the permanent repairs to comply with the work order.
Chicago Title denied their claim arguing that the repairs were not covered under their title insurance policy. The judge hearing the case agreed and ruled that there was no coverage for this type of loss. One of the reasons the judge gave was that the work order was not “registered on title to the property”. This meant that the work order was not registered in the public register where mortgages and deeds to real estate properties were registered. The second reason given by the judge for denying coverage was that the MacDonalds had suffered no “loss” as defined in the title insurance policy. The title insurance policy provided coverage for owners who suffered a loss because their title (ie. their ownership interest) to their property became “unmarketable which allowed another person to refuse to perform a contract to purchase, to lease, or to make a mortgage loan”. The judge said that the owner’s property was just as “marketable” as it always was, with the only difference being that the owners just now had to disclose the nature of the structural problem to a future buyer.
The MacDonalds appealed their case to the Ontario Court of Appeal which criticized the original judge’s reasoning hearing the case and reversed his decision. The Court of Appeal ruled that the MacDonalds were in fact protected under their title insurance policy and ordered Chicago Title to pay for all repairs to the house as well as a substantial portion of their court costs.
What were the Court of Appeal’s reasons for ruling in the MacDonalds’ favour? First of all, the Court of Appeal disagreed that the work order had to be registered on title to the property. The Court pointed out that work orders are never registered against title to properties (which the lawyers for Chicago Title acknowledged to be true) and stated that the original judge had a fundamental misunderstanding of the interplay between title insurance and “off-title searches”. Before title insurance became popular in Ontario, lawyers were required to conduct many additional searches when acting on the purchase of real estate. These searches, called “off-title searches”, included more than half a dozen additional searches (including searches for work orders). Lawyers sent search letters to various municipal, regional and sometimes provincial agencies and departments, and for a fee, would receive “clearance letters” confirming that all matters within each department’s jurisdiction, in respect of the house or building being investigated, were satisfactory. A lawyer couldn’t get the answer he or she needed by just “searching the title”. The lawyer had to pay the fee and get satisfactory responses from whichever agency, be they issues relating to by-laws, zoning, work orders, hydro easements, tax arrears or other matters. What title insurance did was to allow the lawyer, in most cases, to avoid conducting most of these “off-title searches” and instead order a title insurance policy to insure against any losses that these off-title searches would reveal, if performed. So you can imagine the reaction of real estate lawyers to the original judge’s view of the “requirement” that municipal work orders be registered on title in order for title insurance to cover the loss. What then, was the point of title insurance? Since municipal work orders are never registered on title and the only way to discover whether they exist is to write the letter and pay the fee (which the title insurance companies tell us we don’t have to do if we order title insurance), why even order title insurance?
The Court of Appeal gave a second reason why the title insurance company had to pay the MacDonald’s claim, disagreeing with the original judge’s definition of “marketability”. The Court of Appeal said that as a result of the defects in their house, the MacDonald’s title was “unmarketable” as defined in the title insurance policy because a future purchaser could legally refuse to complete an agreement of purchase and sale on learning of the defect. Unlike the original judge, the Court of Appeal said that if the MacDonalds disclosed the defect and sold their house to a purchaser for a lower price, this did not mean their title was “marketable”. The dangerous condition of the property, the Court of Appeal said, flowed directly from the failure of the previous owner to attempt to obtain the necessary municipal approval for the renovations and such failure made the MacDonald’s title unmarketable within the meaning the title insurance policy.
It will be interesting to see if title insurance companies narrow the wording of the coverage of their policies in the future as a response to this case.