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Ontario Court of Appeal Rejects Insurer’s Interpretation of Exclusion Clause in Mortgage Insurance Policy

In Nodel v. Stewart Title Guaranty Company, 2018 ONCA 341, a private mortgage lender ("Mr. Nodel") was the victim of a mortgage fraud. He made a claim for his loss under a mortgage insurance policy which he purchased from Stewart Title Guaranty Company (the "Insurer"). The Insurer denied the claim by relying on a coverage exception in the policy, which provided that the Insurer could deny coverage in the event the proceeds of the mortgage "were paid to" any person other than the "registered title holder." Because Mr. Nodel's lawyer had paid the mortgage proceeds to the borrower's lawyer in trust, rather than directly to the borrower, the Insurer argued the exception applied.

This argument was rejected by a majority of the Court of Appeal. The Court found that the clause was ambiguous, because the ordinary meaning of "paid", which at law amounts to a payment which satisfies an obligation, did not apply. Properly interpreted, the exception in the policy was triggered if the proceeds of the mortgage were transferred beneficially to any person or entity other than the borrower in the insured mortgage transaction. Accordingly, the exception did not apply because:

  • Delivery to a trustee (in this case, the lawyer) is a mode of paying the beneficiary;
  • Payment of mortgage money to a borrower's lawyer in trust is a routine practice and commercially reasonable;
  • If the borrower has counsel, the lender's lawyer actually cannot deal directly with the borrower and must deal with the lawyer;
  • If the Insurer's interpretation were accepted, even a direct deposit into a bank account in the name of the borrower would be insufficient, because a depositor does not own the money in the account – the bank does, subject to a simple debtor's obligation to pay the amount of the deposit to the depositor as its creditor; and
  • If the clause did purport to negate coverage where mortgage proceeds are not transmitted into the hands of the actual registered title holder, the clause would be a nullity.

Justice Nordheimer in dissent found the clause was not ambiguous, and that the majority's conclusion that the plain meaning would result in the "policy insuring nothing" would suggest that the funds had to be received by the actual registered title holder, otherwise the clause would apply. However, in Nordheimer J,'s view, "registered title holder" included an imposter registered title holder. Because the mortgage funds were not handed over or transferred to the registered title holder, or the person everyone assumed was the registered title holder, the funds were not paid in accordance with the terms of the insurance contract.