The court held that the insurer properly denied defence coverage under the “notwithstanding clause”. The allegations in the pleadings combined with the admissions made by the insured were sufficient to trigger the mortgage broker/mortgage intermediary exclusion. As such, the insurer’s decision to deny defence coverage was based on reasonable grounds.

James v. Lawyers’ Professional Indemnity Co., [2006] O.J. No. 46, Ontario Superior Court of Justice

The insured solicitor acted for all of the parties in the sale and mortgage of condominium units. After the mortgages went into default, proceedings were brought against the insured.

The insured’s professional liability insurance policy contained a mortgage broker/intermediary exclusion. The policy also contained a “notwithstanding clause” which allowed the insurer to go beyond the pleadings, conduct its own investigations and consider the underlying facts in coming to its decision regarding defence cost coverage.

It is trite law that the pleadings govern the insurer’s duty to defend. Thus, where it is “clear from the pleadings” that the suit falls outside the coverage by reason of an exclusion clause, the duty to defend does not arise. It was clear from the pleadings that the insured was alleged to have arranged the mortgages. However, it was not clear from the pleadings that he did so as an intermediary. As such, the court concluded that the insurer was wrong to deny defence cost coverage on the basis of the mortgage broker/intermediary exclusion in the policy.

However, the court found that the insurer’s decision to deny defence cost coverage, under the “notwithstanding clause” was made on “reasonable grounds”. The court concluded that the allegations in the pleadings that the insured arranged the mortgages, combined with the underlying fact that the insured, by his own admission, acted as an intermediary, were sufficient to trigger the mortgage broker/mortgage intermediary exclusion by way of the “notwithstanding clause”. The court awarded costs to the insurer on a partial indemnity basis.

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