Title insurance policy limited, court decides
Will a title insurance policy protect a buyer when the house has a serious construction deficiency making it unsafe and unmarketable to a future buyer?
That was the issue in a case decided by the Ontario Court of Appeal last month.
Back in 1999, John Breen purchased a cottage property on Lake Muskoka. His real estate lawyer at the time conducted a building department search with the township and discovered that although a building permit was issued in 1989, a final inspection had not been completed.
A later fire at the township offices destroyed the records, and no one knew whether the structure had passed a final inspection. Knowing this, Breen decided not to request a final inspection.
In 2011, in the process of renovating the kitchen, Breen’s contractor opened a wall and discovered serious violations of Ontario’s Building Code Act. An engineer’s report later confirmed significant structural deficiencies and recommended Breen consider a complete rebuild and not occupy the cottage. It has not been used since 2012.
Breen sued his title insurer, FCT Insurance Company. The basis of the claim was that the structural deficiencies arising from the open or revoked permit made the property unmarketable. In law, this means that a prospective purchaser would have legal grounds to refuse to close a purchase.
FCT denied Breen’s claim on the basis that there was no coverage for risks or defects that he knew about. At the trial last year, Justice Margaret Eberhard ruled in favour of Breen.
In a 13,000-word decision, Justice Eberhard concluded that Breen did not have actual knowledge of the potential defects that were later found.
Fighting its own policyholder, FCT appealed to the Court of Appeal. Last month, a threejudge panel reversed the trial decision, dismissed Breen’s claim, and awarded $25,000 costs against him.
The appeal court drew a distinction between the land being unmarketable — that is, where a buyer would not want to purchase the building — and the title being unmarketable, a situation where there is defective ownership, such as the outstanding permit and inspection in this case.
The court ruled that Breen’s claim was not covered under the policy.
In its residential title insurance brochure, FCT Insurance says, “Many pre-existing issues do not become known until after closing, including such things as … renovations built without required permits …
“With a residential title insurance policy in place, FCT takes on the responsibility to correct these issues or will compensate the insured accordingly.”
That seems inconsistent with their position in this litigation.
The lesson from the Breen case is that not all title insurance policies are the same. Home buyers should carefully review with their lawyers what protections their title insurance policy offers.