Just how bad does a structural defect have to be before the building is considered unmarketable so as to permit recovery under a title insurance policy?
In MacDonald1, the Ontario Court of Appeal offered some important guidance on this point and on the interpretation of standard title insurance policies generally. Although this action for a declaration of coverage was brought by the owner of the home in question, the interpretation principles set down by the Court are equally important for lenders financing such land owners.
The appellant homeowners in MacDonald inadvertently purchased a home where the previous owner had removed some load bearing walls without a building permit or other municipal approvals. These actions rendered the second floor unsafe, and the municipality upon its discovery of the problem issued a work order requiring the homeowners to remedy the unsafe building. The homeowners made a claim under their title insurance policy for reimbursement of the repair costs. When the title insurer denied coverage, the homeowners brought a court application seeking a confirmation of coverage. The motions judge however dismissed the homeowners’ motion for summary judgment and a declaration of coverage saying that the property remained marketable despite the defect.
In overturning the motion judge’s decision, the Court of Appeal reconfirmed the appropriate principles for the interpretation of title insurance policies as follows:
- The court must search for an interpretation from the whole of the contract and any relevant surrounding circumstances that promotes the true intent and reasonable expectations of the parties at the time of entry into the contract
- Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected
- Ambiguities will be construed against the insurer having regard to the reasonable expectations of the parties
- An interpretation that will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided
- Coverage provisions are to be construed broadly, while exclusion clauses are to be construed narrowly
- The contract of insurance should be interpreted to promote a reasonable commercial result
- A clause should not be given effect if to do so would nullify the coverage provided by the policy.2
In MacDonald, the homeowners’ claim for coverage was primarily based upon Section 11 of their policy which provided for coverage in circumstances where:
"11. Your title is unmarketable, which allows another person to refuse to perform a contract to purchase, to lease, or to make a mortgage loan."
The Court determined, in interpreting the coverage provisions broadly, that the building saddled with this structural defect, was not marketable as contemplated by the policy. The fact that someone might be willing to purchase a dangerous defective building at a lower price does not mean that it is marketable. The standard was simply can a potential purchase refuse to close an agreement of purchase and sale upon learning of the defect.3
It was further confirmed by the Court that there was no applicable exclusion to the coverage as stated above. Specifically, the fact that the unauthorized construction was only discovered many years after the policy date did not trigger the exclusion related to “Title risks: … that first affect your Title after the policy date”4, and the Court refused to introduce the discoverability concept. In the Court’s view, the homeowners’ title was unmarketable within the meaning of the title policy from the moment they acquired the property, even if they were not yet aware of that fact.5
At the end of the day, the homeowners were able to claim for the future costs to complete the remedial work, and they did not have to pay for the repairs out of their own pocket and then seek reimbursement from the title insurer. If that were the case, the Court found that only insureds with financial resources to cover the cost of their loss could seek compensation.6
MacDonald offers lenders and their counsel important guidance on the interpretation of title insurance policies generally, and a useful sample application of those principles to a specific fact situation.