



COURT OF APPEAL FOR ONTARIO

CITATION: Lavoie v. T.A. McGill
    Mortgage Services Inc., 2014 ONCA 257

DATE: 20140403

DOCKET: C56909

Epstein, Lauwers and Pardu JJ.A.

BETWEEN

David
    Lavoie, Vickie Lavoie, John Lavoie and

David Lavoie, Estate
    Trustee of the Estate of Helen Lavoie, deceased

Plaintiffs
    (Appellants)

and

T.A.
    McGill Mortgage Services Inc.,

Terrance
    McGill, John Paul Baron, Leeanne Houle,

Maria
    Plishewsky, B2B Trust, C. Ed Gresham,

Pamela J. McLeod, Francesco E. De Sena,

Echelon General Insurance Company
and

LMS
    Prolink Ltd.

Defendants (
Respondent
)

Raymond G. Colautti, for the appellants

Mary Margaret Fox and Paul Emerson, for the respondent

Heard: December 10, 2013

On appeal from the judgment of Justice
Scott
    K. Campbell
of the Superior Court of Justice, dated March 15, 2013.

Pardu J.A.:

[1]

The appellants, the plaintiffs in this action, claim damages arising out
    of alleged fraudulent activities by a mortgage broker. The defendants are the
    mortgage broker, T.A. McGill Mortgage Services Inc. (MMSI), and its associates,
    and the respondent, Echelon General Insurance Company, MMSIs professional
    liability insurer under errors and omissions policies that provided fraud coverage.
    All defendants, except for Echelon, have been noted in default. The motion
    judge granted Echelons summary judgment motion to dismiss the action against
    it on the basis that Echelon had validly rescinded the policies because of
    material misrepresentations and non-disclosures MMSI made in the course of
    applying for coverage.

[2]

The appellants appeal on the following grounds: (1) The motion judge
    erred in holding that any misrepresentations or omissions relating to events
    before fraud coverage was in place were material; (2) Echelons undertaking to
    the FSCO conferred upon the appellants rights that are not voided by the
    rescission of the insurance policies; (3) Echelon should be estopped from
    advancing a legal position that denies coverage to the appellants; (4) The
    appellants are still entitled to relief against forfeiture pursuant to s. 98 of
    the
Courts of Justice Act
, R.S.O. 1990, c. C.43.

[3]

For the reasons set out below, I would dismiss the appeal.

The Factual Background

[4]

In early March 2008, MMSI applied to Echelon for professional liability
    errors and omissions coverage. In this application, MMSI denied that it or its
    partners, officers, employees or subsidiaries had ever been the recipient of
    any allegations of professional negligence in writing or verbally which may reasonably
    give rise to a claim. Further, MMSI denied being aware of facts,
    circumstances or situations which may reasonably give rise to a claim, other
    than as advised above. The policy came into force on April 1, 2008. It did not
    provide coverage for fraudulent acts.

[5]

Subsequent amendments to the
Mortgage Brokerages, Lenders and
    Administrators Act, 2006
, S.O. 2006, c. 29 and regulations, required
    insurers that provided professional liability errors and omissions coverage to
    mortgage brokers licensed and carrying on business in Ontario, such as Echelon,
    to add a fraud endorsement to their policies in the form approved by the
    Financial Services Commission of Ontario (FSCO). Effective July 1, 2008, the
    Echelon policy issued to MMSI was amended to add the fraud endorsement.

[6]

Echelon undertook to the FSCO to provide the fraud endorsement on the
    following terms:

4. The policy covers all claims, subject to standard
    exclusions, made during the term of the policy for acts occurring at any previous
    time, providing the insured had no prior knowledge. The policy will not impose
    a retroactive date exclusion.



10.
Injured third parties will have a
    direct right of action against the insurer under the policy, without affecting
    the insurer[]s right to adjudicate the claim in accordance with the policys
    term[s] and conditions and the right of the insurers right of action [sic]
    against the insured.



13. Regarding the Fraud endorsement:

·

The policy certificate will include additional coverage for loss
    resulting from fraudulent acts and will operate to protect the public within
    the minimum limits required for the Errors and Omissions policy

·

Claims under the endorsement may be made in
    the same manner as claims made under the policy, including notice of claim to
    the insurer and a direct right of action for injured third parties
.

14.  [T]he written confirmation received from the Insurer must
    contain several acknowledgements and undertakings, namely:

·

The Insurer must acknowledge that at no time will any policy
    issued fall short of the standards set out in the minimum requirements set out
    in the minimum requirements above, including an acknowledgement that the FSCO
    endorsement will be automatically added to every policy issued.

·

The Insurer must undertake that all
    interpretations of any policy term will never produce a result that is less
    than the minimum requirements set out in this letter
and will always be
    deemed to result in an interpretation in accordance with at least the
    appropriate minimum requirements.

·

The Insurer must acknowledge that, subsequent to approval of its
    policy by FSCO, the Insurer will not make or cause to be made any material
    changes limiting, restricting or reducing the coverage[] in its policy in any
    respect without prior notice to, and the approval of FSCO. [Emphasis added.]

[7]

The actual fraud endorsement provided as follows:

This Policy [d]oes not apply to:

Damages arising out of any act, omission or
    misrepresentation of the Insured that is dishonest, fraudulent, criminal, or
    malicious.

However, this exclusion shall not apply to:

1.Damages arising
    out of any act, omission or misrepresentation of the Insured that is dishonest,
    fraudulent, criminal, or malicious and was committed by the Insured acting
    within the scope of the Insureds Professional Services as defined in the
    policy.



[8]

In March 2009 MMSI applied to renew the policy. In its March 2009
    application, MMSI answered the following question in the negative:

14.     During the past three years, are you, your employees or
    any of your agents aware of any circumstance, allegation, contention or
    incident which may potentially result in a claim for an error or omission in
    the performance of a professional service being made against your entity, you,
    any mortgage broker or agent or employee present or past associated or working
    with your entity?

[9]

In completing the March 2009 application MMSI agreed to the following:

It is understood and agreed that failure to provide true and
    complete response to any of the questions, statements or request for information
    in this Application or to provide any other information material to this Application
    may, at the sole option of the Company, result in the voiding of the insurance
    policy issued in reliance on this Application and/or denial of coverage for
    specific claims asserted against us (the Applicant) or any other insured under
    the policy.

[10]

In
    September 2009, the appellants brought an action against MMSI and its associates
    for damages arising out of alleged fraudulent activities. Echelon was named as
    a defendant because it was MMSIs professional liability insurer.

[11]

In
    late 2010, Echelon became aware of Crown disclosure in an unrelated action. Based
    on the documents contained in this disclosure, Echelon concluded that MMSIs
    answers on the applications had not been truthful. By letter dated March 24,
    2011, Echelon advised MMSI that it had elected to rescind the policies on the
    basis of material non-disclosures/misrepresentations in the applications,
    thereby voiding the policies from the beginning.

[12]

On
    March 31, 2010, the FSCO suspended MMSIs mortgage brokerage licence and
    revoked it on April 16, 2010.

[13]

Echelon
    brought a motion for summary judgment seeking the dismissal of the appellants
    action as against it.

The Decision under
    Appeal

[14]

The
    motion judge granted Echelons motion for summary judgment and dismissed the
    appellants action as against Echelon.

[15]

The
    motion judge determined that the relevant facts were largely uncontroversial,
    and that the issues before him could be appropriately resolved on a motion for summary
    judgment since a full appreciation of the facts could be achieved without a
    trial.

[16]

The
    first legal issue the motion judge considered was whether Echelon had the right
    to rescind the policies. He found that MMSI did not disclose the following
    facts in the March 2008 and March 2009 applications for insurance coverage:

1.       On
    October 5, 2007, the solicitors acting for one of the plaintiffs in this
    action, David Lavoie, made a demand for payment of funds and threatened to
    commence a lawsuit.

2.       Counsel
    for Mr. Lavoie, by correspondence dated January 28, 2008, gave MMSI an
    ultimatum demanding payment failing which an action would be commenced alleging
    negligence and misrepresentation.

3.       Between
    January 31, 2008, and the effective date of the first policy, offers of
    settlement were exchanged between MMSI and counsel for Mr. Lavoie.

[17]

The
    motion judge held that MMSIs failure to disclose these facts constituted
    misrepresentations, at paras. 50-52:

Plaintiffs counsel argues that not only was the
    misrepresentation not material, but that there was no misrepresentation. He
    bases that argument on the fact that at the time of the application for
    insurance and the effective date of the policy, fraud was not covered.
    Therefore, on these facts, counsel for the plaintiffs submits to the court that
    questions 9(a) and (b) and the answers to those questions could be reasonably
    interpreted to mean that fraud could not reasonably give rise to a claim
    because fraud was not covered. Counsel argues that the only correct answer was
    No.

I disagree. Counsels position ignores the specific question.
    Was McGill aware of any circumstance, allegation, contention or incident which
    might result in a claim for errors or omissions? Information in the possession
    of McGill and MMSI made a negative response to the question wrong. The
    correspondence from the Lavoies law firm and the draft statement of claim were
    clear and unequivocal. There was a potential claim and indeed a potential claim
    for fraud. At the time the second application was completed and the fraud
    coverage included, McGill and MMSI once again answered the question No in
    response to the question.

I find the answers given by McGill and MMSI were
    misrepresentations. The court then needs to consider whether or not these
    misrepresentations were material.

[18]

The
    motion judge held that MMSIs misrepresentations were material in accordance
    with
Mutual Life Insurance Company N.Y. v. Ontario Metal Products

Co
.,
    [1925] 1 D.L.R. 583 (J.C.P.C.). Relying on
Coronation Insurance Co. v. Taku
    Air Transport Ltd.
, [1991] 3 S.C.R. 622, he also concluded that the
    misrepresentations entitled the insurer to rescind the policies and render the
    policies
void ab initio
, at paras 57 and 58:

I find these misrepresentations were material. It is a fair
    conclusion on the evidence that had McGill and MMSI given correct answers to
    the questions, Echelons decision to accept the risk would have been
    influenced. It is reasonable to conclude that Echelon might have declined the
    risk or requested a higher premium. The issue then becomes what is the effect
    of these material misrepresentations?

Rescission of a policy by an insurer on the basis of a material
    misrepresentation for non-disclosure renders the policy void ab initio

[19]

The
    second legal issue the motion judge considered was whether the undertaking given
    to the FSCO negated Echelons right of rescission.

[20]

The
    motion judge rejected the appellants argument that the undertaking was a self-contained
    policy enforceable on its own terms. Relying on
Pilot Insurance Co. v.
    Sutherland
(2007), 86 O.R. (3d) 789 (C.A.), he held that the undertaking
    was analogous to an endorsement that varies the underlying policy but does not
    have independent existence.

[21]

The
    motion judge considered the impact of the FSCO undertaking on Echelons claim
    to have a right to rescind based on material misrepresentation. At para. 67 he noted
    that [t]here is nothing in the FSCO undertaking/guidelines which addresses the
    subject of misrepresentation in application for E & O insurance or the
    insurers right to rescind such a policy. Significantly, the motion judge went
    on to agree with Echelons argument that the FSCO guidelines assume and are
    predicated upon the existence of a valid policy of insurance.

[22]

The
    motion judge rejected the argument that clause 10 of the undertaking to the
    FSCO gave claimants a direct right of action against the insurer despite the
    insurers right of rescission, stating at para. 69:

Clause 10 of the undertaking states that the injured parties
    will have a direct right of action against the insurer under the policy. 
    However, that is stated to be given without affecting the insurers right to
    adjudicate the claim in accordance with the policys terms and conditions and
    the insurers right of action against the insured.

[23]

The
    motion judge concluded, at paras. 72-73, that:

[A]ny direct right of action was subject to the defence
    insurers can raise against the insured.  In this case it is the insureds
    material non-disclosure/misrepresentation that justifies rescissions of the
    policy, rendering them void ab initio.

The defendants affidavit, which is uncontradicted, establishes
    that the subject to language found in clause 10 of the guidelines was added at
    the suggestion of Echelon. This fact further supports the argument that the
    direct right of action does not remove the defences available to the insurer as
    against third parties.

[24]

Finally,
    the motion judge concluded that Echelon was not estopped from rescinding the
    policy because of the FSCO undertaking for two reasons; first, because the
    appellants never relied upon the undertaking, and second, because the
    undertaking was not incompatible with Echelons right to rescind the policy
    because of material misrepresentation.

ISSUES

[25]

The
    appellants argue that the motion judge erred in concluding that their right to
    pursue Echelon directly for losses caused by MMSIs fraud was no longer
    available because of Echelons rescission of the policies based on MMSIs material
    non‑disclosure.

[26]

Their
    arguments can be summarized as follows:

1.

At the time of
    MMSIs first application for insurance in 2008 there was no fraud endorsement
    in the policy. The motion judge erred in holding that any misrepresentations or
    omissions relating to events before fraud coverage was in place were material.

2.

Echelons
    undertaking to the FSCO barred it from refusing the claims of the appellants
    even in the event of material misrepresentation by the insured.

3.

Echelon should
    be estopped from advancing a legal position that denies coverage to the
    appellants.

4.

If Echelon was
    legally entitled to rescind, the appellants are still entitled to relief
    against forfeiture pursuant to s. 98 of the
Courts of Justice Act
.

STANDARD OF REVIEW

[27]

The
    errors the appellants allege do not arise from any findings of fact by the
    motion judge. Rather, the appellants submit that the motion judge erred in
    interpreting the applicable law and relevant legal documents, namely, the
    undertaking to the FSCO, and Echelons contract of insurance with the mortgage
    broker. The parties agree, and I accept, that the standard of review on this
    appeal is therefore correctness:
Housen v. Nikolaisen,
2002 SCC 33,
    [2002] S.C.R. 235, at para. 8;
Bell Canada v. The Plan Group
, 2009 ONCA
    548, 96 O.R. (3d) 81, at paras. 30-31.

ANALYSIS

Did MMSI make material misrepresentations
    or non-disclosures in its insurance applications?

[28]

The
    appellants argue that the information that MMSI did not disclose was irrelevant
    to the coverage being contracted for since the 2008 policy did not, at the time
    the application was completed, include fraud coverage. Therefore, the
    non-disclosed information was not material.

[29]

The
    test of materiality is measured by the standard of a reasonable insurer. An
    inaccuracy in an answer on an application for insurance does not permit the
    insurer to void the policy unless accurate answers would have led a reasonable
    insurer to act differently by refusing to accept the risk or by imposing
    special conditions: see
Sayle v. Jevco Insurance Co.
(1984), 58
    B.C.L.R. 122 (S.C.), at p. 126, affd (1985), 16 C.C.L.I. 309 (B.C.C.A.).

[30]

The
    question of materiality is one of fact. Here, there was uncontradicted
    evidence, provided by a program manager in a senior underwriting position with
    Echelon and by an independent underwriter, indicating that the misstatements
    and non-disclosures in respect of the 2008 and 2009 applications were material
    to the decision to offer insurance.

[31]

The
    motion judge did not err in accepting this evidence, nor in relying on this
    evidence to find that these inaccuracies were material ones that would justify
    rescission of the policies by Echelon.

Was rescission available to Echelon in the light of
    the FSCO fraud coverage undertaking?

[32]

The
    appellants argue that the undertaking to the FSCO vested the appellants with an
    independent direct right of action against Echelon with respect to fraud
    coverage that cannot be voided by the rescission of the insurance policies.

[33]

I
    disagree. The motion judge correctly found that the wording in the FSCO
    undertaking, that: [i]njured third parties will have a direct right of action
    against the insurer
under the policy, without affecting
    the insurer[]s right to adjudicate the claim in accordance with the policys
    term[s] and conditions
 (emphasis added), meant that a third party claim
    depended on the existence of a valid policy. Accordingly, because Echelon was
    entitled to rescind the policies and did so, the appellants do not have a
    direct right of action against Echelon.

[34]

The
    appellants also argue that to allow the insurer to rescind the policies
    effectively nullifies the fraud coverage provided for the benefit of third
    parties, and for that reason it could not have been intended to allow an
    insurer to rescind the policies on the ground of material misrepresentations.

[35]

I
    do not agree. Allowing rescission in these circumstances does not go so far as
    to nullify coverage for the benefit of third parties. If there had been no
    material misrepresentation in the application and a fraud-based claim had been
    made during the currency of the policy, the fraud coverage would have applied for
    the benefit of the third-party plaintiff or plaintiffs.

Should Echelon be estopped from advancing a
    position that denies coverage to the appellants?

[36]

The
    appellants submit that Echelon should be estopped from advancing a position
    that denies coverage based on Echelons undertaking to provide fraud coverage to
    insured parties.

[37]

The
    motion judge was correct to reject the appellants argument that the insurer
    was estopped from relying on the misrepresentations to rescind the policies
    because of the undertaking, in light of the evidence that the appellants had
    not relied on any actions or statements by the insurer, and in light of the
    fact that the undertaking to provide fraud coverage is predicated on the
    existence of a valid policy.

Did the motion judge err in failing to exercise his
    discretion to grant the appellants relief against forfeiture pursuant to s. 98
    of the
Courts of Justice Act
?

[38]

The
    appellants submit that the court has a broad power to relieve against
    forfeiture of fraud coverage caused by McGill and MMSIs misrepresentations
    under s. 98 of the
Courts of Justice Act
, and that it would be
    appropriate to do so in the circumstances of this case.

[39]

It
    is well established that an applicant for insurance must act with the utmost
    good faith. This means that, where the applicant makes a material
    misrepresentation in an application for coverage, the insurer has the right to
    rescind the policy, rendering it void from the outset: see
Lloyds London,
    Non-Marine Underwriters v. National Armoured Ltd
. (1996), 142 D.L.R. (4th)
    506 (Ont. Gen. Div.), affd (1999), 174 D.L.R. (4th) 493 (Ont. C.A.).

[40]

While
    some policies of insurance and some statutory regimes explicitly provide that a
    third party is unaffected by material non-disclosure by the insured, there is
    nothing in the policies relevant to that effect.

[41]

After
    argument of this appeal the court invited submissions from the parties about the
    impact, if any, of the decision in
Kozel v. The Personal Insurance Company,
    2014 ONCA 130
, released after argument of the appeal. In
Kozel,
this
    court held that s. 98 of the
Courts of Justice Act
can operate, in
    addition to s. 129 of the
Insurance Act
, R.S.O. c. I.8, to grant
    relief against loss of a right caused by a failure to perform a covenant or
    condition in a contract of insurance. The motor vehicle insurer argued that
    authorization to drive was a statutory condition precedent to coverage. Since
    the insured had allowed her drivers licence to lapse at the time of the
    accident, the insurer argued there could be no relief from forfeiture.

[42]

This
    court noted, at para. 40 of
Kozel
, that when a breach constitutes
    imperfect compliance with a policy term, relief under s. 98 of the
Courts
    of Justice Act
is available. In contrast, if the breach amounts to
    non-compliance with a condition precedent to the insurance policy, relief under
    s. 98 is not available. This court indicated, at para. 41, that the focus in
    this analysis is on whether the breach of the term is serious or substantial.
    Where the term is incidental, its breach is deemed to be imperfect compliance;
    where the provision is fundamental or integral, its breach is cast as
    non-compliance with a condition precedent. On the facts in
Kozel
, this
    court held that the contractual language describing the term as a condition was
    not conclusive, and that the lapse of the licence amounted to imperfect
    compliance with a policy term rather than non-compliance with a condition
    precedent.

[43]

In
    my view,
Kozel
does not assist the appellants. Assuming that the
    appellants can, pursuant to s. 98 of the
Courts of Justice Act
, apply
    for relief from forfeiture resulting from misrepresentations by the insured,
    relief under s. 98 would not be available to the appellants because the
    breaches in this case constituted non-compliance with a condition precedent.
    The misrepresentations and omissions in the applications were material and went
    to the heart of Echelons decision to provide coverage. The fundamental impact
    of a material misrepresentation in an application for insurance is reflected in
    the jurisprudence entitling an insurer to rescind a policy in these
    circumstances. The motion judge did not err in refusing to grant relief from
    forfeiture pursuant to s. 98 of the
Court of Justice Act
.

DISPOSITION

[44]

For
    these reasons, I would dismiss the appeal. I would award costs to the
    respondent fixed at $33,000, inclusive of HST and disbursements.

(PDL)

Released: April 3, 2014

G. Pardu J.A.

I agree Gloria Epstein J.A.

I
    agree P. Lauwers J.A.


