Coverage for title insurance extends beyond claims by the insured against his or her lawyer to claims made by third parties against the lawyer

At issue was whether the respondent title insurance company owed a duty to defend the applicant lawyers in civil proceedings in which the applicant lawyers were named as defendants. The question was whether the claims against the lawyers arose under the policy of title insurance. The court held that the phrase “claims arising under the title insurance policy” required that the subject matter or scope of the coverage be consistent with the policy but that the claim did not need to be asserted by the insured against the lawyer in order to trigger the agreement requiring the title insurer to defend the lawyer so long as the claim was asserted by a party standing in the shoes of the insured.

Nakhuda v. Stewart Title Guaranty Co., [2010] O.J. No. 6170, September 10, 2010, Ontario Superior Court of Justice, M.A. Penny J.

At issue in this judgment of the Ontario Superior Court of Justice was whether the respondent, Stewart Title Guaranty Co., owed a duty to defend the applicant lawyers in civil proceedings in which the applicant lawyers were named as defendants.

The court held that the relationship between Stewart Title and the applicants was governed by a letter that established an agreement under which when a title insurance policy is issued to a purchaser or mortgagee of an interest in land, Stewart Title agrees to:

indemnify and save harmless the member of the Law Society of Upper Canada and the member’s law firm (“the member”) acting as solicitor(s) for the transferee(s), chargee(s), and/or the title insurer(s) from and against any claims arising under the title insurance policy(ies),…

The court held that the issue in the application involved the meaning and scope of the phrase “claims arising under the title insurance policy.”

The court held that this raised issues analogous to duty to defend cases. It was common ground that the duty to defend, in the first instance, is determined by allegations in the pleadings. As such, the court engaged in a similar analysis here.

The court gave judgment on two separate applications. The first was the Nakhuda proceeding. Nakhuda represented DF, TF and a man who alleged to be RO, in the transfer of land from DF and RO to TF. The entire transaction was a fraud and the net proceeds were misappropriated. Nakhuda also acted for Scotia Mortgage Corporation in placing the mortgage. Scotia’s interest was protected by the purchase of a Stewart Title policy of title insurance. The real RO commenced an action against Nakhuda, DF, TF and Scotia and the person posing as RO for damages resulting from fraudulent transfer of property to TF.

Stewart Title denied that the agreement entitled Nakhuda to any indemnity on the basis that the plaintiff, RO, was not covered by any title insurance policy issued by Stewart Title and that the indemnity provided on the agreement “only applies where an insured under a title insurance policy brings a claim against a lawyer acting on the title insured transaction.” Counsel for Nakhuda argued that since Scotia could have asserted a claim against Nakhuda which would have invoked indemnity under the agreement, Nakhuda was entitled to full indemnity in relation to defending the RO action, even though Scotia, in fact, asserted no such claim.

The court held that the agreement was clear that for indemnity to be engaged, the claim must “arise under” the insurance policy. The court noted that the only claim against Nakhuda had been made by RO, who alleges that Nakhuda should have done more to detect and prevent the fraudulent transfer of his property to TF. RO had no insurance claim. The court held that RO’s claims against Nakhuda did not relate to any Stewart Title insurance policy because RO did not have one. As such, the court held that RO’s claims against Nakhuda could not possibly be said to “arise under” a Stewart Title policy of insurance.  The court dismissed the Nakhuda application holding that there was no obligation to indemnify in the circumstances of the RO case.

The second proceeding, the Katz proceeding, was then addressed by the court. Katz represented Mr. and Mrs. F in purchasing residential property. Mr. and Mrs. F purchased a title insurance policy issued by Stewart Title. It turned out that a building permit had not been issued by the City and Mr. and Mrs. F sued the developers, the city, and the building inspector. Subsequently, the City commenced a third party action against Katz alleging that any damages caused to Mr. and Mrs. F by the City were caused or contributed to by the negligence of Katz which included failing to make appropriate inquiries with respect to building permits.

The court held that although Mr. and Mrs. F themselves did not make a claim against the lawyer, the claim against the lawyer is, on its face, in respect of a matter covered by title insurance. The court held that this is because the absence of a building permit could well be an “adverse circumstance affecting the land which would have been disclosed by a local authority search” by the lawyer.

Counsel for Stewart Title argued that “arising under” the policy requires not only that the subject matter or scope of the coverage be consistent with the policy but that the claim against the lawyer must, and can only, be asserted by the named insured under the policy.

The court agreed with Stewart Title that it cannot reasonably be found responsible to lawyers under the agreement for risks which are greater or more expansive than those Stewart Title covered for insureds; however, extending coverage for otherwise covered claims, even though they may be asserted by someone other than the insured, was, in the circumstances of the case, consistent with the partys’ reasonable expectations as to the scope of risk undertaken in the agreement between Stewart Title and the members of the Law Society of Upper Canada. The court noted that the City, by statute, was permitted to stand in Mr. and Mrs. F’s shoes and assert rights that were otherwise be available only to Mr. and Mrs. F. The court held that this is what the City had done in this case. Further, as the allegations and claims of the City against Katz can be said to “arise under the insurance policy”, Stewart Title was obligated to fund reasonable defence costs of Katz.

This case was digested by Katherine E. Tinmouth and edited by David W. Pilley of Harper Grey LLP.

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