In upholding dismissal of action, ONCA finds material misrepresentations could not be relieved against by s. 98, CJA

In Lavoie v. T.A. McGill Mortgage Services Inc., the Ontario Court of Appeal in a decision released on April 3rd, 2014, upheld the dismissal of this action against Echelon, the professional liability insurer of a mortgage broker, T.A. McGill Mortgage Services Inc. (MMSI), which was sued by the plaintiffs for alleged fraudulent activities.

Echelon provided fraud coverage pursuant to amendments to the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 and regulations, which 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 FSCO. The endorsement provided in part that “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 policy’s term[s] and conditions and the right of the insurer’s right of action [sic] against the insured”.

The motion judge granted Echelon’s summary judgment motion to dismiss the action against it on the basis that Echelon had validly rescinded the policies because of material misrepresentations and non-disclosures MMSI made in the course of applying for coverage.

The appellant plaintiffs’ appeal on the following grounds was refused: (1) The motion judge erred in holding that any misrepresentations or omissions relating to events before fraud coverage was in place were material; (2) Echelon’s 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; and (4) The appellants are still entitled to relief against forfeiture pursuant to s. 98 of the Courts of Justice Act.

The decision is significant because in one of the first cases to consider the Court’s recent decision in Kozel v. The Personal that dealt with the application of s. 98, the Court found that it did not assist the appellants here because “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 Echelon’s 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.”.