



COURT OF APPEAL
    FOR ONTARIO

CITATION: Breen v. FCT Insurance Company Ltd., 2019 ONCA 598

DATE: 20190712

DOCKET: C65634

Lauwers, Fairburn and Nordheimer JJ.A.

BETWEEN

John Bernard Breen

Plaintiff (Respondent)

and

FCT I
nsurance Company Ltd.

Defendant (Appellant)

Andrew Faith, Jeffrey Haylock and Emma Carver, for the
    appellant

David Morin and Peter Reinitzer, for the respondent

Heard: June 14, 2019

On appeal from the order of Justice Margaret Eberhard of
    the Superior Court of Justice, dated June 14, 2018, with reasons reported at 2018
    ONSC 3644.

Nordheimer J.A.:

[1]

The appellant, FCT Insurance Company Ltd., appeals from the judgment declaring
    FCT responsible for certain losses sustained by the respondent, John Breen, in
    relation to a property for which he had obtained title insurance with FCT.

Background

[2]

This case involves a cottage property located in the Muskoka
    area of Ontario in the Township of Lake of Bays. Construction of the cottage
    began in October 1989 under the authority of a building permit issued by the
    Township. During the cottages construction, the Townships Chief Building
    Official performed three inspections, on August 17, 1990 and June 3 and 12, 1991.
    He did not find any fault with the construction. In his last two reports, he
    wrote that construction had reached the stage at which the building was ready
    for drywall.

[3]

On January 28, 1992, the Townships Chief Building Official wrote to the
    owner of the cottage, stating that no inspection had been requested for over
    six months and that, if the owner did not reply to the letter by February 14,
    1992, the Township would assume the project was complete and close its files. Almost
    a year and a half later, on June 15, 1993, the Chief Building Official wrote to
    the owner again (the 1993 Letter), indicating that the Township considered
    construction to be complete, that the Township would advise the Assessment
    Commissioner to add the property to the tax roll, and that the Township had
    closed its file on the permit.

[4]

Mr. Breen purchased the property under power of sale in 1999. Before the
    purchase closed, the Breens conveyancing solicitor had written to Mrs. Breen
    (the intended purchaser at the time), on March 4, 1999, to advise of the
    results of a building department search. The conveyancing solicitor stated:

The Building Department for the Township of Lake of Bays have
    advised us as follows:

1.  A Building Permit for the
    cottage was issued in 1989.

2. Inspections with respect to the
    foundation, drainage and insulation were completed in June, 1991.

3. The Building Department sent a
    notice in 1992 to the owner indicating that a final inspection of the cottage
    was outstanding.

4. In 1996, the building Department
    lost its records in a fire. Due to the fire, no one knows whether the cottage
    ever passed its final inspection.

The Building Department does not appear to be concerned as to
    whether or not the cottage had a final inspection. I am inclined to leave things
    as is and not request that the Building Department conduct a final inspection
    of the cottage prior to closing. If you disagree with my suggestion, please
    call me.

[5]

The Breens accepted their conveyancing solicitors advice and did not
    request a final inspection. Before the March 15, 1999 closing, Mr. Breen, who had
    been substituted as the purchaser of the cottage for Mrs. Breen, obtained a
    title insurance policy (the Policy) from FCT for a premium of $347, again on
    the advice of the Breens conveyancing solicitor.

[6]

Approximately 10 years after acquiring the cottage, in 2011, the Breens
    decided to renovate the kitchen. In the course of preparing for the renovation,
    their contractor opened up a wall and identified violations under the
Building
    Code Act, 1992,
S.O. 1992, c. 23. An engineer was then retained. The
    engineers inspection identified several significant structural issues that
    need to be dealt with. The Breens were advised that the cost of repairing these
    issues might be prohibitive. Indeed, their contractor and the engineer advised
    that a complete rebuild will be an option youll need to consider. The
    engineer also warned the Breens not to occupy the cottage. The Breens heeded
    that advice and stopped using the cottage in 2012, about 13 years after its
    purchase. The cottage has not been used since.

[7]

On February 26, 2014, Mrs. Breen sent a notice of claim to FCT. On March
    3, 2014, FCT initially confirmed coverage, on the understanding that there was
    an open building permit on the Property, but it reserved the right to change
    its decision should further facts emerge. That occurred. On May 21, 2014, FCT denied
    coverage because it had learned that there was no open building permit, and
    that, instead, the Township has closed its file on the permit.

[8]

Two actions have been commenced resulting from these facts. The first
    action, which was commenced on February 18, 2014, is a claim by the Breens in
    negligence against the Township. The second action, commenced on March 17, 2015
    and giving rise to this appeal, is a claim by Mr. Breen against FCT under the
    Policy.

The Decision Below

[9]

The trial judge began her analysis by stating that any finding of
    coverage under the Policy turned on whether the principles enunciated by this
    court in
MacDonald v. Chicago Title Insurance Company of Canada
, 2015
    ONCA 842, 127 O.R. (3d) 663 applied. The trial judge then considered the terms
    of the Policy and how those terms compared to the terms of the title insurance
    policy that was at issue in
MacDonald
.

[10]

The
    trial judge found, like the situation in
MacDonald
, that there was no
    work order that Mr. Breen could have discovered when he purchased the cottage
    in 1999. The trial judge concluded that the defects in the cottage were latent
    defects. She then held, at para. 46:

It has taken the investigations in this law suit to uncover the
    inadequacy of the Building Permit process, and subsequent futility of
    inspection by a Building Inspector to detect design problems which must be
    designed and inspected by an engineer, and insufficient inspection to justify
    an assumption that the building was complete.

[11]

While
    recognizing that a finding of coverage in these circumstances might be an
    unexpected extension of what is understood to be a title defect, the trial
    judge considered the decision in
MacDonald
as binding on her. She
    interpreted
MacDonald
as instructing her to take a broad approach to
    the interpretation of the coverage provisions: at para. 47. The trial judge
    concluded that the differences in the defects between the two cases were ones
    of detail, not of kind: at para. 48. Relying on
MacDonald
, the trial
    judge found that the factual situation here fell within the coverage offered by
    the Policy for unmarketable title. The trial judge said, at para. 51:

I find that the structural defects which flow directly from the
    inadequacy of the Building Permit process, and subsequent futility of
    inspection by a Building Inspector to detect design problems which must be
    designed and inspected by an engineer, and insufficient inspection to justify
    an assumption that the building was complete, resulted in the dangerous
    condition of the property which has made the Plaintiff's title unmarketable.

[12]

The
    trial judge went on to consider the exclusions under the Policy and found that
    none of them applied to the situation in this case. In particular, she found
    that Exclusion #1  which excluded coverage for losses arising from the
    existence or violation of any law, by-law, order, code or government
    regulation, unless the violation or enforcement of such matters appeared in
    Public Records as at the policy date  did not apply because it was too broad
    and/or vague and consequently should be given a narrow interpretation. She also
    observed that this court had not said in
MacDonald
that such an
    exclusion could be applied to title risk of unmarketability: at paras. 64-69.

[13]

The
    trial judge also considered Exclusion #3, which excludes coverage for title
    risks actually known to the purchaser. The trial judge concluded that this
    exclusion did not apply because, while Mr. Breens solicitor knew about the
    1993 Letter, there was nothing that would have caused the solicitor to do any
    further investigation into the matter: at paras. 115-121.

[14]

Finally,
    the trial judge rejected FCTs argument that counsel for Mr. Breen had changed
    the basis for his claim during closing submissions. More specifically, FCT had submitted
    that the basis on which Mr. Breen sought relief in his closing submissions, and
    on which the trial judge found liability, was not pleaded in Mr. Breens amended
    statement of claim. In rejecting that argument, the trial judge found that FCT strategically
    wore blinders, that it was aware of the issues and simply chose not to address
    them through evidence: at paras. 84-106.

[15]

Consequently,
    the trial judge found that Mr. Breen was entitled to coverage under the Policy
    for the losses arising from the defects in the cottage.

Analysis

[16]

In
    my view, the trial judge erred in her conclusion regarding the Policy and
    whether it covered this situation.

[17]

The
    standard of review applicable to the interpretation of a standard form policy
    of insurance is correctness:
Ledcor Construction Ltd. v. Northbridge
    Indemnity Insurance Co.,
2016 SCC 37, [2016] 2 S.C.R. 23, at para. 4.
    Applying this standard of review, I find that the trial judge erred in failing to
    recognize significant distinctions between the facts in this case and those in
MacDonald
.

[18]

In
    my view, in applying the decision in
MacDonald
, one has to be careful
    to recognize what the court did, and did not, decide in that case. One also has
    to be cognizant of the specific facts that led to the conclusion that there was
    coverage under the title insurance policy in that case.

[19]

There
    are two fundamental differences between this case and
MacDonald
. First
    is the fact that Mr. Breen was on notice at the time of purchase of a potential
    problem with the building permit process and the inspections (or lack thereof)
    when the cottage was constructed. Central to the conclusion in
MacDonald
was the fact that there was no reason for the purchasers, or their conveyancing
    solicitor, to know that construction (more accurately demolition) had been
    undertaken without a building permit. Consequently, there was no reason for the
    conveyancing solicitor to make any inquiries in that regard.

[20]

Here,
    the conveyancing solicitor knew that the cottage had been constructed pursuant
    to a building permit issued by the Township. The conveyancing solicitor also
    knew that there had been some inspections of the construction but no evidence
    that a final inspection had been conducted. Indeed, the conveyancing solicitor
    advised Mrs. Breen that they could ask the Township to conduct a final
    inspection prior to completing the purchase, but the solicitor thought it
    better to let matters lie as they were.

[21]

The
    second distinguishing fact is that in
MacDonald
, had the conveyancing
    solicitor known of the demolition of load bearing walls and conducted a further
    investigation (i.e., an off-title search for a building permit), the
    solicitor would have discovered that no building permit existed. That would
    then have alerted the solicitor to the fact that the demolition was done
    illegally. Those are the critical facts that turned the matter into a title
    issue in
MacDonald.
As Hourigan J.A. said in
MacDonald
, at
    para. 74:

The dangerous condition of the property, therefore, flows
    directly from the failure of the previous owner to attempt to obtain the
    necessary municipal approval. That failure has made the appellants' title
    unmarketable within the meaning of clause 11 of the title policy.

[22]

In
    this case, however, the evidence is that, even if a final inspection had been
    conducted, that inspection would not have revealed the construction defects
    because those defects were hidden behind the walls of the cottage that were
    already constructed (and which had apparently already passed inspection).
    Therefore, had Mr. Breen insisted that the Township conduct a final inspection
    before the purchase was completed, that inspection would not have revealed the defects.
    The defects would not then be an issue regarding the marketability of the title,
    even under the broad meaning given to that term in
MacDonald
.

[23]

Further,
    the off-title search that Mr. Breens conveyancing solicitor did conduct revealed
    that there was a building permit for the construction of the cottage (unlike
    the situation in
MacDonald
). That off-title search not only would not have
    revealed the construction defects, but also would not have revealed any of the
    other deficiencies that Mr. Breen alleges were associated with the handling of
    the building permit by the Township, and the construction undertaken pursuant
    to that building permit.  The purpose of title insurance is to protect against
    what off-title searches would reveal  and obviate the need for exhaustive and
    costly off-title searching  not to protect against defects that would not be
    revealed by such searches.

[24]

On
    this point, it is also important to know that the Policy in this case draws a
    very clear distinction between situations where the land is unmarketable and
    where the title is unmarketable. Each of those situations is described in the Policy
    in terms of what is covered and what is not. The situation facing Mr. Breen in
    this case is much more akin to an issue with the marketability of the land than
    it is with the marketability of the title. I note that this same distinction
    was drawn by this court in
Fischer v. Stewart Title Guaranty Co.,
2014
    ONCA 798 in denying a claim under a title insurance policy. I would add that,
    if I assume that the situation here leads to the land being unmarketable, unfortunately
    for Mr. Breen, the cause of the unmarketability of the land is not one of the
    causes for which coverage is provided under the Policy.

[25]

For
    these reasons, in my view, the trial judge erred in applying
MacDonald
to this case and she erred in concluding that the situation here was covered by
    the unmarketability of title provision in the Policy.

[26]

Given
    that conclusion, it is not necessary to address the issue of whether either of
    the two exclusions adverted to by the trial judge apply. Nevertheless, I will
    address the exclusions briefly. It is unnecessary to get into an analysis of the
    wording of Exclusion #1 other than to note that the trial judges observation
    that the wording appears to very broad was one that was open to her. That fact,
    coupled with the fact that exclusion provisions are to be construed narrowly,
    would appear to pose an obstacle for FCTs attempted reliance on that
    exclusion. I must add, though, that the trial judge erred in drawing from
MacDonald
support for her conclusion that Exclusion #1 would not apply to this situation
    since the application of Exclusion #1 was not actually addressed in
MacDonald
.

[27]

It
    is difficult to see, however, how Exclusion #3 does not capture this situation,
    even if the coverage provisions of the Policy would otherwise cover it.
    Exclusion #3 expressly provides that no coverage is provided for title risks
    that are actually known to you, but not to us, on the Policy Date  unless
    they appear in the Public Records. Public Records are defined as records
    established and maintained under the
Registry Act
and
Land Titles
    Act
.

[28]

As
    will be seen from my analysis above, the title risk for which Mr. Breen claims
    coverage in this case  namely, the alleged failings by the Township in the
    building permit process  was known to him. Mr. Breens conveyancing solicitor
    expressly recognized the issue and provided advice on it. Further, the
    information that gives rise to that knowledge is not information coming from
    records established and maintained under either of the two statutes mentioned
    in the definition of Public Records.

[29]

Consequently,
    had I otherwise concluded that the defects in the construction of the cottage
    were caught by the provision providing coverage for unmarketable title, I would
    have found that the coverage was excluded by Exclusion #3.

[30]

Given
    my conclusions on this matter, it is not necessary to address the issue of whether
    the trial judge was correct in finding that the basis for liability was
    properly and adequately pleaded. I will say, though, that the trial judges apparent
    criticism of trial counsel on this point does not appear to be justified. There
    was an arguable basis for counsels concerns regarding the scope of the amended
    statement of claim.

Conclusion

[31]

The
    appeal is allowed, the judgment is set aside, and Mr. Breens claim is dismissed.
    FCT is entitled to its costs of the appeal fixed in the agreed amount of $25,000,
    inclusive of disbursements and HST. The panel was advised that counsel had
    worked out an agreement with respect to the costs of the action so I do not
    need to address those costs.

Released: IN July 12, 2019


I.V.B.
    Nordheimer J.A.



I agree.
    P. Lauwers J.A.


I agree. Fairburn J.A.



