Introduction 1. The Claims Process 1 How and when to submit a claim 1 What information you will need to provide 2 How covered claims are resolved 4

TABLE OF CONTENTS – Part III

Grimsby Lecture Series – September 16, 2014

PART III

Title Insurance Claims: What’s New? And What Isn’t

Prepared by: Frank Maggisano, Vice President – Claims & Quality Assurance

Stewart Title Guaranty Company

Introduction

1

The Claims Process

1

How and when to submit a claim

1

What information you will need to provide

2

How covered claims are resolved

4

Claims under Common Endorsements

5

Vacant Land Endorsement

5

Multi-unit Endorsement for Residential Owner Policies

7

Septic Endorsement

7

What’s New? Recent Trends and Changes to the Case Law

9

The use of Title Insurance as an answer to requisitions

9

Discharges, undertakings and private mortgages

10

Fraud

11

Title Insurance Claims: What’s New?

And, what isn’t.

Frank Maggisano

VP, Claims and Quality Assurance

Stewart Title Guaranty Company

As many of you know, title insurance has become a routine part of conveyancing in Canada, and has been for a while. Given that Canadian properties are turning over, on average, every 5 to 7 years, most residential properties in Ontario are protected by a title insurance policy. If you haven’t already, you will likely have to deal with a title insurance claim under an owner’s or lender’s policy. This paper will attempt to provide you with the basics of the Claims Process: (1) How and When to Submit a Claim;

(2) What Information You Will Need to Provide to Support Your Claim, and; (3) How Covered Claims Are Resolved.

Under this latter heading, we will provide claims-specific examples of how claims have been resolved. This paper will also review some of Stewart Title’s most common Endorsements. We will review how the Endorsement works and provide some case-specific examples. Finally, we will detail recent trends in real estate and mortgage fraud and discuss changes to the case law regarding title insurance.

A. The Claims Process

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Where an insured owner or lender becomes aware of a potential claim against their interest in a property, the Insured should contact the insurer promptly to advise them of the potential claim.

Failure to provide prompt notice of a claim can impact coverage under the policy.

Under Stewart Title’s policy, the Insured has an obligation to provide prompt notice of potential claims. Failure to provide early notice may affect coverage where that failure prejudices Stewart Title’s ability to dispose of or defend the Insured against the claim. As well, proof of loss should be provided to Stewart within 90 days after the insured knows the facts which will let the insured

For claims under Stewart Title policies, you can submit your claims notices via:

o Email: claims.canada@stewart.com o Fax: (416)703-3349, or o Lettermail: P.O. Box 65 200 Bay Street Toronto, Ontario M5J 2J2

establish the amount of the loss. Stewart’s obligations under the policy may be reduced if the insured fails or refuses to provide a statement of loss, answer Stewart’s questions adequately, provide Stewart with requested documents and that failure or refusal affects Stewart’s ability to dispose of or defend the insured against the claim.

Claims can come in many forms; from the obvious, such as a requisition letter at the time a property is being sold, or a statement of claim from an adjoining land owner claiming a right of way over the insured property, to the obscure, such as a passing comment from a neighbour about an encroaching shed. Regardless of the nature of the potential claim, an Insured would be well advised to err on the side of caution and notify their title insurer of potential claims sooner rather than later. This is particularly the case where a potential claim appears in the context of the sale of a property. While Stewart Title responds promptly in urgent closing situations, it is understandably easier and less stressful for the Insured to deal with potential claims as soon as they arise.

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In order to provide you with the most prompt and efficient service, when providing Stewart Title with notice of a potential claim, you should always provide the home owner or lender’s name, a copy of their policy, the address of the Property, a copy of their Transfer and a brief description of the circumstances leading up to the claim. Please also advise us whether there are any imposed deadlines, such as closing dates, municipal work order deadlines, etc… affecting the Property or your claim.

Once the claim is assigned to a Claims Handler, you may be provided with a Request for Information, where it is determined that further information is required. The documents required to properly investigate a claim inquiry will vary from claim to claim. Having said this, about 40%

“I can deal with this problem now; Stewart Title can pay me back later.”

We appreciate that, as lawyers, often our first reaction is to resolve issues ourselves. In the Claims Department, we often receive claims after lawyers have already incurred several hours of billable time, seeking reimbursement under the policy. Like other forms of insurance, pre-approval of expenses by the insurer is required. Stewart Title’s policy specifies that the insurer is only obligated to reimburse an insured for those expenses which it has approved in advance. This is particularly true of lawyers’ fees. As an insurer, Stewart Title has an several options available to it when dealing with claims, some of which, can be more cost effective than pursuing legal action. For that reason, the policy language is clear: the insurer only has to reimburse those fees which it has pre-approved.

of the claims received by volume relate to tax arrears, water arrears or condominium fee arrears. For these types of claims, there are some standard documents that will be required to properly investigate your claim. Sending these documents with your notice of claim will help speed up the claims’ investigation process.

Documents required for other types of claims can vary as much as the claims do. When dealing with claims that relate to the structures on the property (such as open permits, or work done without a permit for which the municipality has issued an Order), documents requested may include the original APS, MLS, any pre-purchase home inspection reports, and any correspondence or notices from the municipality.

For other types of claims, any documents relating to the claim matter, such as pleadings, correspondence from neighbours, registered instruments, surveys (if available), photographs, and reporting letters may be required. This information is helpful not only in determining whether or not a claim is covered, but also in determining how the claim can be best resolved.

For tax arrears or water arrears claims, an Insured will be asked for the following documentation:

 contact information

 copy of the Transfer/Deed

 copy of the Agreement of Purchase and Sale (if new home or condo)

 copy of the Statement of Adjustments

 copy of the vendor’s undertaking to readjust

 copy of the first tax or water bill showing the arrears

 where the Insured has paid the bill, proof of payment

This documentation allows the title insurer to confirm that the Insured purchased the property and has an insurable interest; how the taxes were adjusted on closing; what the taxes for the property are; and, what has been paid.

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(a) The Title Insurer’s Options: Under the title insurance policy, the insurer has the right to choose from several options when dealing with a claim. These can include paying out a loss, curing the title defect, negotiating a settlement with a third party, or defending or prosecuting an action. The policy imposes a duty on the insurer to defend the title as insured. This duty can be ended by paying out the loss.

Recently, an Insured requested that Stewart Title defend their title as it had been insured. In this particular case, after purchasing the property, the Insured obtained an up to date survey of the property. The survey disclosed that the fence across the rear property line encroached onto the Insured’s property across the width of the property by 5 inches. The Insured had commenced an action for an order requiring that the fence be relocated to the property boundary. The neighbour, in turn, defended the action, claiming adverse possession. After receiving the Statement of Defence, the Insured filed a notice of claim under the title policy on the basis that someone was claiming an interest in the Insured’s property. In that case, having reviewed the evidence provided by the neighbour and assessing the value of the land in dispute, Stewart Title opted not to defend the title as insured, but instead, paid the Insured the loss of value incurred as a result of not owning the five inch strip. As such, it is best to advise clients to provide your title insurer with notice of a potential claim before commencing actions; and, review the options available to the title insurer (Stewart Title’s options can be found under Condition 4 of the Residential Gold Owner’s Policy).

This is not to say that Stewart Title never exercises its duty to defend title; Stewart Title often engages in defence of title actions and applications where the alternatives are either too

“But, c’mon, Stewart! We’re old friends! You can take my word for it!” “Why do you need all this STUFF?!”

From time to time, we receive feedback about the amount of documentation required to process a claim. Stewart Title understands that many claims are time sensitive and that the documentation required may not always be at your fingertips. Although we value your informed opinions, please understand that our claim files are subject to regulatory audits, both internally and externally, and without proper claims investigation procedures, Stewart Title is at risk of both censure from regulators, and loss as a result of insurance fraud. We do endeavour to ensure that our claims investigation is as painless as possible and we will always try to work with lawyers and Insureds to make certain that our investigation process is fair, complete and reasonable.

expensive or would fail to resolve the claim inquiry. For example, in a recent case in the Ottawa area, Stewart Title’s insured was facing a claim by a neighbour that would result in no access to the Insured’s property as well as force the removal of the Insured’s garage and septic system, which the neighbour claimed encroached onto his property. In attempting to settle the matter out of court, it became apparent that the neighbour wanted an exorbitant amount of money. Stewart Title exercised its duty to defend, paying all legal fees involved in prosecuting a claim against the neighbour. After a lengthy trial, the Insured’s title was found to be as insured, and the neighbour’s claim was dismissed with costs. The case took years to reach a trial decision, throughout which, it may have been easier for Stewart Title to simply cave in to the neighbour’s demands. However, in this particular instance Stewart Title decided to pursue the defence of title. The neighbour however has filed an appeal.

(b) Claims arising as a result of Work Orders: Another important provision of the policy that affects how claims are handled relates to claims arising as a result of work done without a permit, and which the municipality has ordered be corrected. Where the cost of repairs is less than $50,000, the repair work must be done. Where, however, the cost of repairs is in excess of $50,000, the insurer is not obligated to do the repairs but can remove the offending portion of the structure and pay the resulting loss of value.

B. Claims under Common Endorsements

Endorsements are used to tailor the policy more closely to the specific facts of a transaction. Endorsements may add coverage, limit coverage or otherwise alter coverage under the policy. Accordingly, they are as important to understand as the policy jacket itself. The following section will deal with claims under some of the commonly used endorsements to the residential policy.

Vacant Land Endorsement

Where an insured is purchasing vacant land, the Vacant Land Endorsement is automatically affixed to the policy. The Vacant Land Endorsement for the Residential Owners policy provides as follows:

1. The within Policy is hereby amended as follows:

a. The addition of a new Covered Title Risk 34 which shall read:

The following use is allowed as of the Policy Date under the zoning classification applicable to the Land – continuation of the present use as vacant land.

2. Schedule B of this Policy is hereby amended to add the following exception from coverage:

The Company does not insure against loss or damage arising from the zoning for the Land not permitting the construction of a residential dwelling or any other improvements on the Land. 3. Notwithstanding any other provisions of this Policy, the Company

is not liable for and will not pay any loss or damage related to the inability of the Insured:

a. to have constructed any improvements on the Land; b. to legally use any improvements on the Land constructed

after the Policy Date; or

c. to have constructed on the Land a single family residence.

The Vacant Land Endorsement impacts owner coverage in two ways. First, it removes coverage relating to the use of the property as “Single Family Residential”. Second, it makes it clear that the property is being insured only as vacant land. There is no coverage for the use of the property as anything but vacant land. Therefore, where your client buys vacant land with an intention to develop it in the future, your searches are very important, since the Insured cannot rely on title insurance regarding future intended use. As you are no doubt aware, if your retainer does not include these searches, it is important that you advise your client accordingly.

In terms of title insurance claims, where a policy has a Vacant Land Endorsement, any loss payable under the policy will be calculated based on its use as vacant land. For example, if a property is insured as vacant land, and after closing, the Insured discovers that an adjoining property owner has an easement over a portion of the insured land, there will be coverage under the policy with respect to another party having rights over the insured Property. The loss payable, however, will be the difference between the value of the property as vacant land subject to the easement and value of the property as vacant land not subject to the easement. The coverage for lenders is different with respect to vacant land. For a lender, the Vacant Land endorsement reads as follows:

1. The within Policy is hereby amended as follows: a. The deletion of Covered Title Risk 12.

2. The Company is not liable for and will not pay any loss or damage related to the inability of the Insured:

a. To have constructed any improvements on the Land other than a single family residential structure.

This provision does not limit the coverage in Covered Title Risks 15, 17, and 19 of the Gold Residential Loan Policy.

This coverage provides broader coverage to a lender as it does provide coverage for loss or damage sustained where the construction of a single family residential structure is not permitted.

Multi-Unit Endorsement for Residential Owner Policies

For residential properties, the default policy provides coverage for the use of the property as Single Family Residential. Where an insured is purchasing a property containing between 2 and 6 units, this should be indicated when ordering your client’s policy. As part of the order form, the lawyer will be asked if a building and zoning search has been completed. The building and zoning search needs to be reviewed to determine if it reveals any deficiencies which should be reviewed with Stewart Title’s Underwriting Department. Where a building and zoning search is not completed prior to closing, exceptions will be added to the policy to exclude coverage for defects in zoning and for work orders. As a result, if the search requirements have not been complied with, claims relating to the use of the property as multi-unit will not be covered.

The following are signs that the property might be multi-unit:

1. The use provision in the agreement of purchase in sale refers to the property as being multi-unit;

2. Provision is made in the statement of adjustments for rental adjustments for more than one unit;

3. The Agreement of Purchase and Sale references that multiple fridges and stoves are included as chattels; and/or,

4. The Agreement of Purchase and Sale references that the vendor is not warranting the retrofit status or legality of a basement unit.

While these may be signs of a multi-unit, even in their absence, the only way to determine whether or not the property is multi-unit is to check with the purchaser.

Septic Endorsement

The Septic Endorsement is issued in connection with both residential owners’ and lenders’ policies where the house is not connected to a municipal sewer system but instead uses an onsite waste treatment system. The Septic Endorsement is not available for commercial properties, regardless of their waste treatment system. No search of municipal health units or other departments is required in order to obtain the Septic Endorsement. The coverage in the Septic Endorsement protects an Insured against loss or damage from the types of defects that would be revealed if a search of records was done.

The Septic Endorsement insures an owner against loss or damage relating to the following: 1. The Company insures against loss or damage sustained by the Insured arising

from any outstanding notice of violation, deficiency notice or work order issued as of the Policy Date affecting the septic system which services the Land.

2. The Company also insures against loss or damage sustained by the Insured in the event that a Local Authority Search would have disclosed:

a) that the certificate of approval and/or the use permit issued for the septic system servicing the Land does not conform with the current as-built nature of construction; or

b) that a certificate of approval and/or a use permit had not been issued at the time the septic system was constructed and a certificate and/or use permit was required at the time of construction.

The Septic Endorsement also provides limits to coverage, as follows:

3. The Company does not insure against any loss or damage related to the functionality and/or age of the septic system unless such loss or damage arises from an issue covered under paragraphs 1 and 2 above.

4. For the purposes of item 29 under the Covered Title Risks section of this policy a response to a Local Authority Search indicating that there is no record with respect to a septic system installation or permit for the Land shall not constitute an adverse circumstance for the purposes of item 29.

5. Coverage under this Endorsement applies provided that the Governmental Authority having jurisdiction over the regulation of the septic system would respond to requests for certificates of approval, use permits and/or work orders, if requested.

6. Coverage under this Policy and Endorsement applies if the septic system services only a residential house of 1-6 units. There is no coverage under this Policy and Endorsement for septic systems that service commercial buildings or residential buildings of more than 6 units or for mixed use commercial/residential buildings.

Several things are important to note about the coverage under the septic endorsement. First, the endorsement does not cover a situation where a septic system breaks down. It is not a warranty against system failure, or improper approvals. As well, health units, particularly in areas that have undergone municipal reorganization in recent years, may not have complete records. The complete absence of records is not sufficient to trigger coverage under the endorsement.

Coverage is available, however, and we do see claims where municipal authorities issue work orders prior to the Policy Date requiring that malfunctioning septic systems be repaired or replaced, or where prior owners have made alterations or repairs to systems without obtaining the appropriate permits.

The most frequent claim covered under the Septic Endorsement occurs when a system is installed at the time a home is constructed, and at some future point, additional bathrooms or bedrooms are added to the home. The size of a septic system is related to the number of fixtures (bathrooms, sinks, laundry) and the number of bedrooms contained within a property. The theory being that the more bathrooms and bedrooms there are in a house, the greater the load on the septic system. Of course, larger systems are more expensive than smaller systems,

and when houses are constructed, many builders tend to install smallest possible system to meet requirements under the Building Code. As bedrooms and bathrooms are added, the existing system may be deemed undersized and non-compliant by the governing authority. Depending on the size of the property, and the location of any wells, these claims can be expensive, often requiring the installation of highly engineered systems. While our experience has been that a septic system can typically be installed between $10,000.00 to $20,000.00, certain factors, such as the size of the property, presence of a well or if the location is near a large body of water, can often increase costs, with some systems costing upwards of $70,000.00.

C. What’s New? Recent Trends and

Changes to the Case Law

The Use of Title Insurance as an Answer to Requisitions

Thomas v. Carreno1is a case involving a failed residential real estate purchase transaction. Thomas agreed to buy a home from Carreno for $1.51M and put down a $100,000.00 deposit. Within the time frame for submitting requisitions, Thomas’s lawyer discovered that there was an open building permit at the City of Toronto for renovations, for which Carreno had been responsible. While the work had been completed quite some time earlier, and inspections carried out throughout the construction process, no one had requested a final inspection necessary to close the permits. Thomas’ lawyer requisitioned the closure of the building permit. The closing was scheduled in the summer months. Carreno contacted the building department right away but, as a result of the building inspectors’ vacation schedules; it became apparent that the final inspection was not going to occur before the closing date. Section 10 of the Agreement of Purchase and Sale signed by Carreno and Thomas contained the following language:

If within the specified times referred to in paragraph 8 any valid objection to title or to any outstanding work order or deficiency notice, or to the fact that the said present use may not lawfully be continued, or that the principal building may not be insured against risk of fire is made in writing to Seller and which Seller is unable or unwilling to remove, remedy or satisfy or obtain insurance save and except against risk of fire (Title Insurance) in favour of the Buyer and any mortgagee (with all related costs at the expense of the Seller) and which Buyer will not waive, this

1

2013 ONSC 1595; affirmed by the Ontario Court of Appeal in Bronfman-Thomas v. Carreno, 2013 ONCA 566.

Agreement notwithstanding any intermediate acts or negotiations in respect of such objections, shall be at an end and all monies paid shall be returned without interest or deduction.... [emphasis added].2

On the afternoon of closing, with Thomas threatening not to close the deal, Carreno’s lawyer contacted Stewart Title. Stewart Title agreed to underwrite a policy in favour of Thomas and their mortgagee. In addition, Carreno offered to holdback $100,000 from the closing proceeds until the building permit could be closed. Carreno received no response to their offer, and the transaction failed to close.

After the scheduled closing date, Thomas requested the return of their $100,000 deposit, which Carreno refused. Thomas brought an application seeking the return of the deposit on the basis that Carreno had breached their obligation to provide good and marketable title. Carreno defended on the basis that they had honoured their obligations by providing title insurance with respect to the open permit. It was Carreno’s position that Thomas was in breach of the agreement, and that Carreno was therefore entitled to retain the deposit.

At the Divisional Court, the judge sided with Carreno, and held that, because of section 10 of the Agreement of Purchase and Sale contemplated title insurance as an acceptable response to a requisition, Thomas was obligated to close the transaction when Carreno offered title insurance, even though it came at the eleventh hour. The Court also emphasized the duty of both vendors and purchasers to act in good faith in carrying out their obligations under an Agreement of Purchase and Sale. As a result, Carreno was able to retain the deposit and was also awarded costs both at trial and on the appeal.

Although there is often uncertainty in the practice of law, one thing that is certain is when a real estate transaction falls off the rails and fails to close, the actions and advice of the lawyers on both sides of the transaction will be scrutinized. The language of the Agreement of Purchase and Sale in this case is standard in many jurisdictions in Ontario and lawyers should be aware of the Court of Appeal’s interpretation.

Discharges, Undertakings and Private Mortgages

We have received several claims recently which highlight the importance of following up on undertakings to discharge mortgages and the importance of not accepting undertakings to discharge private mortgages.

In the first instance, as part of a routine purchase transaction in 2009, a lawyer gave an undertaking to obtain and register discharges of two institutional mortgages registered against title. Funds were paid to the lawyer and presumably forwarded to the institutional lenders. Time passed and the purchaser’s lawyer received confirmation that the first mortgage had been discharged; however the second mortgage remained registered against title. The purchaser’s lawyer did follow up annually on the undertaking, but never received a response from the

vendor’s lawyer. In 2014, when their annual request for a discharge was sent out, the letter was returned as the vendor’s lawyer no longer practiced law in Ontario. At that time, a claim was filed under the title insurance policy. While we were just beginning our investigation into the matter, it appeared that the second mortgage was a line of credit which was not closed at the time of sale, and the vendor had run up a balance on it. For this reason, the lender did not issue a discharge. Stewart Title located the vendor’s lawyer in another province, where she is still practicing law and will be requiring her to satisfy the undertaking.

Undertakings to discharge mortgages from institutional lenders should be followed up diligently for several reasons. First, a client may decide to refinance or sell a property at any time, and the presence of the vendor’s mortgage may have to be dealt with on an urgent basis. Second, the lawyer who gave the undertaking may move (as was the case here), or in other cases we have seen lawyers pass away or be disbarred. Third, in cases where the mortgage is a line of credit, the longer it is not dealt with and closed, the more likely that the prior owner will run it up, making it more difficult to negotiate a resolution with the lender.

In addition to following up diligently on undertakings to discharge mortgages (or other undertakings given on closing), it is important when dealing with the discharge of private mortgages that undertakings not be accepted, but rather discharges be available on closing. In a recent claim, a purchase transaction closed in 2009. At that time, the vendor’s lawyer gave an undertaking to discharge a private mortgage. After closing, a dispute arose with the private mortgagee over a claim for an additional $1,800.00, which the mortgagee claimed was owed by the vendor. There was a flurry of correspondence immediately following closing. The vendor’s lawyer demanded the discharge, and advised his client to have the amount paid, however, nothing was resolved, and the purchaser’s lawyer failed to follow up on the discharge. In 2014, the purchaser received a power of sale notice with respect to the mortgage. The mortgagee was now claiming in excess of $30,000.00, which included a $700.00 monthly penalty accruing since 2009. Stewart Title is following up with the vendor’s lawyer, who fortunately is still practicing in Ontario, and has entered into negotiations to obtain a discharge of the mortgage. Stewart Title and the Law Society of Upper Canada require that lawyers neither give nor accept undertakings to discharge private mortgages. The above claim example illustrates some of the pitfalls associated with such a practice. In addition to the risk of a lender disputing the amount owing on the mortgage, other risks include (at least in the case of individuals) the lender passing away, moving or stopping operations. In that instance, lawyers are then left in a position of having to deal with the lender’s estate to obtain a discharge, or trying to obtain a court order to obtain the discharge; both of which will add delay, complexity and expense.

Fraud

Fortunately, we have not seen any new or different types of fraud, and the incidence of fraud claims does not appear to be increasing. However, this is not because of the absence of fraud, but rather because of some of the additional controls which have been instituted by Stewart Title’s Underwriting Department. Indeed, over the past year, we have become aware of two instances where Stewart Title was asked to insure private mortgage transactions and our investigation of the circumstances led the underwriter to have concerns about the identity of the

borrower. In both cases, Stewart Title declined to insure those transactions. We later discovered that both transactions went ahead, and in both cases it turned out that an imposter had signed the mortgages. These mortgages will likely be removed from title on the basis that they are fraudulent instruments at a significant loss to the lenders.

We also continue to see claims where an owner is able to fraudulently inflate the amount of equity in a property by falsifying mortgage statements from existing mortgagees. Where a lawyer is acting on a transaction for a second or lower priority mortgagee and part of his or her retainer is to confirm the balance owing on the prior mortgages, the lawyer needs to confirm this information independently, and not to rely on information provided by the borrower or the mortgage broker.

Notwithstanding the diligence of underwriters, imposter frauds do still occur. As a reminder, lawyers should be alert to the following signs of potential fraudulent involvement:

 Property is mortgage free, or near mortgage free

 Interest and fees being charged on the mortgage is high

 The borrower is elderly

 The clients are new to the lawyer, and other registered documents show other lawyers have acted for the client recently

 There is urgency to the closing

 If a purchase is involved, deposits are paid directly to the vendor, or otherwise cannot be confirmed

 Deposits not called for in the original agreement have been paid, without explanation

 Signatures on the ID do not appear to be similar to signatures on documents

 Proceeds of the mortgage are not paid to the borrower but directed to third parties unrelated to the transaction

 Where a corporation is the registered owner, changes to directors or officers have been filed recently (although may not be dated recently)

 The property is vacant land

 A power of attorney is being used

 The borrower does not speak English, and does not appear to understand the transaction

 The purported age of the borrower does not match the physical appearance of the borrower

 The borrower brings a “friend” who does all the talking in any meeting

Our Fraud Verification Team has developed various methods to identify fake identification. As noted earlier, this work has helped us identify potential fraudulent transactions before providing insurance. We would caution you to carefully examine all identification presented to you by clients with whom you have no prior relationship. In a fraud claim from Quebec, the notary who acted for the fraudulent vendor and purchaser was beside himself when he called in to the Claims Department once the fraud had come to light. As it turns out, the date of birth on the fraudulent identification described a man twenty years younger than the man who attended in his office. As the notary told our Claims Counsel “hindsight is 20/20”. As a result of this fraud, the lender was out over $300,000.00 and the owner of the home had to fight to get her title back. This notary will surely be checking identification more carefully from now on.

A mortgage fraud claim came in last summer dealing with property in a smaller municipality. The true owners of the home were notified of the fraud when they received a letter from their insurance company congratulating them on their recent refinance; surprisingly a refinance the owners had no knowledge of. This fraud is a good example for several reasons. First, the identification that was used by the female fraudster came back as invalid. The fraudster claimed that it had been administratively suspended in error and presented a form, allegedly from the MTO, claiming that her new license was in the mail. Upon closer inspection, this form contained grammatical errors and used different typographical fonts. Our Claims Department contacted Service Ontario and confirmed that the form was a forgery. Given the information provided to us by Service Ontario and the legitimate owners, it became apparent that third parties obtained entry into the true owner’s home and stole not only their identification, but also title documents and a copy of their homeowner title insurance policy.

Secondly, despite assurances to Stewart Title to the contrary, the lawyer acting for the fraudsters disbursed the mortgage funds to six different individuals and a generically-named company. Given our experience, mortgage funds distributed in such a way suggests possible fraudulent activity.

Thirdly, one of the cheques went to the mortgage broker, claiming to be for fees. These fees amounted to 10% of the mortgage amount. When the investigator retained by Stewart Title spoke to the broker, he had no explanation as to why his fee was so extraordinarily high for this transaction. As a result of the hard work in our Claims Department and our field investigators, we were able to recoup close to 80% of the fraudulently disbursed funds. Only one fraudster was able to cash their cheque at a cheque cashing company. We have obtained a default judgment against this individual and are currently investigating our recovery options.

Notwithstanding the safeguards which have been put in place, fraudsters will continue to try to use the credibility of lawyers as a cloak for their criminal activities.

D. Conclusion

Having handled claims under title insurance policies for many years, the following are some practical tips for lawyers that can make the claims process easier for their clients:

1. Provide prompt notice of potential claims;

2. Be aware of search requirements for commercial properties or multi-unit residential properties;

3. Review schedule B to the Policy with your clients – these are the matters not covered by the policy;