Over the past few years Ontario has been hit by a wave of fraudulent real estate transactions involving identity fraud – people either forging or fraudulently conveying or charging properties, using the identity of the registered owner. Most of the property in Ontario is registered under a land registration system called the Land Titles Act (the "Act"). The Act is a Torrens system of title registration which guarantees the title shown on its parcel registers, the pages showing the owner of the land and the specific encumbrances.
A year ago, the leading case in Ontario was the Ontario Court of Appeal decision in Household Realty Corp. v. Liu, (2005) OJ No. 5001, which relied on subsection 78(4) of the Act (which said that a fraudulent transfer or charge is valid and enforceable once registered) to hold a forged mortgage valid because the lenders did not participate in the fraud. This meant that title was considered "immediately indefeasible" and in a series of Ontario cases innocent owners lost their title or had it subject to a valid charge, and needed to apply for compensation from the Land Titles Assurance Fund (the "Fund"), which exists under the Act to compensate those prejudiced by the impact of the Act.
This was an important insurance issue in Ontario because title insurers were greatly impacted by the phenomena. In Ontario, a residential title insurance policy provides coverage after the date of the policy for forgery where someone else claims an interest in or a lien against the property. That clearly covered the identity fraud that was occurring. In addition, a title insurance policy, as an indemnity insurance policy, includes a duty to defend the title – to deal with the litigation related to such fraud and to make a claim against the Fund. Title insurers used these advantages to market their product and sold a number of policies to existing home owners because of these concerns. At the same time, title insurers suffered because they were often bearing the costs of these claims and rarely were compensated by the Fund.
Over the past year there have been changes to the law in Ontario that impact on the growing phenomenon of real estate title fraud on residential homeowners in this province. The first was the enactment by the Province of Ontario of Bill 152, the Ministry of Government Services Consumer Protection and Service Moderation Act, 2006, introduced on October 19, 2006 and which became law on December 20, 2006 ("Bill 152"), which amended the sections of the Act impacted by title fraud. The second was the decision of the Ontario Court of Appeal in Lawrence v. Wright, O.J. No. 381, in which the court reversed the position previously taken by Ontario courts in respect of title fraud. The third was an amendment to the Rules of Professional Conduct for lawyers in Ontario.
Bill 152 solved the problem by making amendments to section 78 of the Act to make it clear that subsection 78(4) does not mean immediate indefeasibility in cases of fraudulent conveyances. Rather, the deferred indefeasibility model is what operates.
While there were other amendments, the key changes are to section 78 of the Act, where subsection 4.1 exempts the fraudulent instruments registered on or after October 19, 2006 from either doctrine of indefeasibility. Bill 152 goes to provide for the deferred indefeasibility model by saying, in subsection 4.2, that subsection 4.1 does not invalidate instruments that are not fraudulent instruments registered subsequent to a fraudulent instrument. Accordingly, the doctrine of deferred indefeasibility now applies in connection with fraudulent instruments. That reverses the position taken in all of the cases decided before last fall and means that the initial transfer or charge is invalid. However, a subsequent transfer from the interim owner to an innocent purchaser or chargee would be indefeasible.
Clearly, the deferred indefeasibility approach exposes title insurers to greater risk. A title insurer was never at risk when it insured a fraudulent purchaser or lender, because of the policy exclusions. However, previously an "innocent" insured purchaser or lender would have obtained good title and the title insurer would not be called upon to compensate the insured, as it would have been the Fund which was compensating the true owner.
It should be noted that Bill 152 affirms that the Fund is a fund of last resort and that a title insurer is not able to collect from the Fund. Bill 152 has expressly said that claims against the Fund cannot be made by an insurer or as a subrogated claim, the kind an insurer would make. If an owner or lender is title insured, once the title issue is resolved it is the title insurer, not the Fund, that compensates the owner or lender. This is prejudicial to title insurers who are unable to rely on the provisions of the Act as others are.
The Ontario government, in addition to enacting Bill 152, also made submissions when the Lawrence case was heard last fall by five Justices of the Court of Appeal, including Ontario's Chief Justice. The Court spent some time reviewing the position put forward by the Province of Ontario – the deferred indefeasibility model. The Court looked at the earlier cases, including the reasoning set out in the Court of Appeal's decision in Household Realty, and concluded "both the result and that reasoning to be incorrect" and adopted the deferred indefeasibility model.
Rules of Professional Conduct
The body that regulates lawyers in Ontario, the Law Society of Upper Canada, joined the fight against title fraud by amending the Rules of Professional Conduct for lawyers in Ontario earlier this year to require that lawyers acting for both purchasers and lenders, as is commonly the case, provide both clients all material information relevant to the transaction in writing. The commentary to the Rule suggests that lawyers investigate matters such as recent price escalation or recent transfers, even if not instructed to do so by the parties. The goal is to assist the parties in discovering fraud or other illegal activity.
Impact on Title Insurance
In Ontario, it is still prudent for a purchaser or lender receiving a conveyance of a home to obtain title insurance, for several reasons. First, if the conveyance is fraudulent the party could be the "intermediate owner" and the title or charge would be void as it was made pursuant to a fraudulent instrument under section 78(4.1) of the Act. Second, the title insurance policy covers for future fraudulent acts such as a later fraudulent transfer or charge. Third, as a title insurance policy is an indemnity policy, a title insurer is obliged to pay the litigation costs to protect the title that the title insurer has insured whether as an "intermediate owner" or a true owner obtaining rectification of title. Fourth, if you lose title or your title is subject to a charge, a title insurer would have an obligation to pay under the policy once the title question has been settled. A claim for compensation under the Act would require going through the process of showing, in addition to proving the claimant is unable to get compensation from other sources, that the claimant has met the obligation of doing reasonable due diligence (as set out by the Director of Titles) and the claim has been made within a six year time limitation period. In addition to the cost and delay of applying to the Fund these are all possible ways to lose compensation. A purchaser or lender initially acquiring title to a home will still wish to obtain title insurance coverage. The change to the Rules of Professional Conduct may disclose and eliminate some fraud, but won't eliminate the need for these coverages.
Title insurers in Ontario also use the risk of title fraud as a way to market coverage to existing owners, and now the risk of the most extreme downside, that an insured could lose title to the home as a result of fraudulent activity, is greatly reduced. However, where an owner does not occupy but rents the home, it generally still remains prudent to title insure today, to protect against fraudulent charges and the cost of rectifying the fraud. Clearly, it will be much more difficult for Ontario title insurers to market their policies to existing owners of residential properties.
Since Bill 152 and the Lawrence case do not eliminate the risk of title fraud itself, but only modify which parties maintain title and which need to claim compensation from the Fund, title insurers still have an insurance product that has a strong position in the residential market in Ontario. Unfortunately, since it is now clear that title insurers cannot obtain compensation from the Fund and innocent insureds, such as lenders who commonly purchase title insurance, will not be given the insured title or charge, the cost of providing that coverage may result in title insurance premium increases unless the wave of title fraud in Ontario is brought under control.
This writer doesn't think that the change to the Rules of Professional Conduct will achieve that control by simply informing purchasers and lenders. It will be interesting to see how the title insurers will react to the written disclosure of material information to their insureds. A standard exception in a title insurance policy is matters not known to the insurer, but known by the insured at the date of the policy. To the extent that lawyers identify matters and disclose them in writing to their clients, but not the title insurer, that may be a basis to later deny coverage.
However, my feeling is that the title insurers will not be generally looking for that option, but will want to have that information disclosed to them as well. Similarly, prudent lawyers protecting their insured clients will also want to disclose to the title insurer to avoid any risk of loss of coverage to their client. The title insurers will then be able to use their own familiarity with various types of title fraud to assist in stopping the fraud before it occurs. Disclosure to an experienced third party title insurer may help combat title fraud in Ontario.
This article originally appeared in the International Law Office on June 12, 2007.
This article appeared in Corporate Insurance Brief Fall 2007. To subscribe to this publication, please visit our Publications Request page.