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Insurable Interest in a Title Insurance Policy

In a recent unreported title insurance case, Nadvornianski v. The Stewart Title Guaranty Company, 2006 CanLII 21787 (ON S.C.) (the “Nadvornianski Case”) Stewart Title brought a preliminary motion that a nominee, holding title to a property for her husband and a third party, did not have an “insurable interest” under the title insurance policy based on three Ontario insurance cases. The court held that there was a real question to decide as to whether or not the named insured had an “insurable interest” and said that the matter should be determined at trial.

The claim was one against both Stewart Title and the lawyers who acted for Nadvornianski in respect of the exact location of a water line and sewer line that were the subject of a registered easement. The Plantiffs’ claimed that the actual location of the pipes caused them to alter their designs, Stewart Title was liable for their financial losses under the title insurance policy and that their lawyers were negligent in failing to determine the nature and extent of the easement. While the claim seems “soft” and I can understand why both Stewart Title and LawPro would want to find any reasonable basis to defeat it, it raises interesting questions about “insurable interest” under a title insurance policy and provides a note of caution for lawyers acting for insureds to be certain that they are careful to disclose to title insurers the full circumstances surrounding any title insured purchase.

Historically, there was no common law principle stopping citizens from either betting on contingencies or insuring their own losses. It was difficult to distinguish insurance from gambling. The England, the Marine Insurance Act in 1745 and the Life Insurance Act in 1774 outlawed wagers made under the guise of insurance, as people were required to have an “interest” in the object of their insurance. In Canada the need for an “insurable interest” developed by both common law and statute was based on three policies: 1) a policy against wagering, 2) a policy against the limitation of indemnity (insurance is just to maintain the status quo not to provide a profit) and 3) a policy of removing incentives to destroy the insured property (if you can profit when your neighbour’s house burns, you can gain if you cause the fire). Accordingly, having an “insurable interest” is a basic principle in the insurance area.

Based on a number of Canadian cases from the leading case of Kosmopoulos v. Constitution Insurance Co. of Canada [1987] 1 S.C.R. 2 to the three specific cases cited in the Nadvornianski Case, a nominee that does not hold any actual interest in a property may not be entitled to the benefit of a title insurance policy even though it holds registered title and the premium has been paid for coverage in its name. As well, in addition to that “insurable interest” question explored in the Nadvornianski case, there is also the straightforward exclusion from coverage 3(c) in a title insurance policy which says the insurer will not pay loss or damage which arises by reason of defects, liens, encumbrances, claims or other matters “resulting in no loss or damage to the insured claimant”. If the insured claimant is simply a nominee that exclusion could be argued as well.

How does a lawyer protect clients in those situations? The most telling factual point for me was the last point in the Statement of Facts in the Nadvornianski Case: “The Defendant’s solicitors did not advise Stewart Title of the nature of the ownership of the property.”

Great care must be taken in acting for a client on an owner’s policy to ensure that the title insurer is given with the correct information as to who the insured claimant actually is. It isn’t unusual to structure a transaction so that title is held by a nominee. There are a variety of legitimate business and tax structures which suggest that in many cases. However, a lawyer has a responsibility to his client to ensure that the title insurance coverage being purchased is preserved and to make full and adequate disclosure to the title insurer before the policy is issued. It is not uncommon to get an Additional Insured Endorsement, listing the names of all the parties with beneficial and registered interests in the property to ensure that that coverage remains in place.

In the Nadvornianski Case, whether or not the defendant lawyers would be liable to their clients for failing to point out the precise location of the sewer and water lines, they would seem likely to liable to their clients for failing to advise Stewart Title of precisely who the parties were that owned the property and would be suffering the loss.

Bruce McKenna

October 10, 2006 in Title Insurance | Permalink

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