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The risks of failing to comply with terms and conditions of insurance policies

- by Debra Rolph, LAWPRO Research Co-ordinator

Ontario lawyers rely on the LAWPRO liability insurance policy to defend and indemnify them should they be sued for professional malpractice. Like any other legal malpractice coverage, however, certain conditions must be met before either defence or indemnity will be provided by LAWPRO. In other words, failure to comply with these contractual conditions may lead to a forfeiture of LAWPRO's coverage. Several reported cases illustrate how important it is for insureds to adhere to the conditions of their insurance policy.

The case - Failing to report in a timely fashion

A Nova Scotia solicitor, Michael Moore, was engaged by Central Guaranty Trust Company to place a first mortgage on a property purportedly owned by the wife of his senior partner, Rockwell, to secure a loan made by Central Guaranty to Rockwell. A title search disclosed that the property was in fact owned by Rockwell's infant son.

On February 8, 1988, Rockwell and his wife executed the mortgage, which was duly registered. Moore certified a first mortgage to Central Guaranty. The money was used entirely for Rockwell's purposes, not for the benefit of the infant. Moore was unaware that Court approval was necessary. The mortgage was invalid by reason of the failure to obtain Court approval.

On December 9, 1988, a legal officer of Central Guaranty wrote to Moore expressing concern that the mortgage was invalid and stating that he expected Moore to rectify the problem. Both Rockwell and the Central Guaranty legal officer thought that it might be possible to obtain a court order to rectify the mortgage; however, Moore did no research on the point, nor did he consult an experienced solicitor about the problem.

No court application was ever brought. Indeed, by late summer, 1990, Rockwell refused to co-operate in bringing such an application. On October 17, 1990, Moore reported the matter to his insurer. Rockwell declared bankruptcy shortly thereafter. The mortgage was never repaid.

Moore's malpractice insurer, Canadian Lawyers' Insurance Association Co., denied coverage, on the basis that Moore failed to report the Central Guaranty's potential claim to it in a timely fashion.

The judgment

The Nova Scotia Court of Appeal held that the insurer was justified in denying coverage to Moore on the basis of late reporting, and that relief from forfeiture was not available to him. Failure to notify the insurer within a month or so of the December 9, 1988, letter deprived the insurer of the opportunity to suggest to Central Guaranty that it move immediately to demand that Rockwell repay the mortgage. Rockwell was still solvent in late 1988 and in 1989. It is probable that Rockwell could have paid out the mortgage at that time. Moore's behaviour was not reasonable, and the insurer was seriously prejudiced by it.

Moore v. Canadian Lawyers' Insurance Association, (1994) 18 C.C.L.I. (2d) 1 (N.S.C.A.)

The case - Giving notice within the policy period

Re/Max Omega Realty (1988) carried professional liability insurance with American Home Assurance Company.

On December 7, 1993, Re/Max received written notice of a potential claim against it from a purchaser who alleged that a Re/Max agent gave negligent advice concerning the suitability of a property's well. Although American Home's coverage expired on December 31, 1993, American Home was not put on notice until January 28, 1994. American Home offered "extended" reporting period coverage for an extra premium, but Re/Max did not apply for it. Instead, it took out insurance with Jevco for 1994. American Home denied coverage on the basis that the claim was not reported within the policy period.

The judgment

The Ontario Court of Appeal held that American Home was justified in denying coverage. It was a pre-condition to coverage that notice be given within the policy period. This was not done. Giving notice within the policy period was an integral part of the event triggering coverage. It could not be said that such a failure was "imperfect compliance" with the policy condition, such that relief from forfeiture could be given by the Court. It was not up to the Court to rewrite the insurance policy.

Stuart v. Hutchins; American Home Third Party, (1998), 40 O.R. (3d) 321 (C.A.)

[Note: The LAWPRO policy contains a similar condition!]

The case - Failing to co-operate with the insurer

The El-Amads retained an Ontario lawyer named Goldberg to prosecute a claim for damages sustained in a motor vehicle accident.

Goldberg failed to ensure that certain undertakings given on behalf of the El-Amads were satisfied, and their action against the defendants was dismissed in the summer of 1993. Goldberg did not report the dismissal to LAWPRO.

LAWPRO learned of the dismissal from a representative of the El-Amads in 1995. LAWPRO contacted Goldberg to attempt to obtain details of the claims. Goldberg refused to meet with LAWPRO or provide it with information concerning the claims.

When Goldberg was served with a statement of claim in 1996, he failed to report to LAWPRO. Counsel for the El-Amads arranged to have a litigation guardian appointed for Goldberg. The litigation guardian brought an application for a declaration that LAWPRO was obliged to defend the action against Goldberg.

The judgment

The application was dismissed. The court noted that Goldberg not only failed to immediately notify LAWPRO of the dismissal of the action, he never informed the insurer at all. Even more seriously, he failed to co-operate with LAWPRO in any way, despite LAWPRO's great efforts to obtain his co-operation. LAWPRO was clearly prejudiced by his failure to report and to cooperate. If he had reported the claim it was highly likely that in the summer of 1993 the order dismissing the plaintiffs' action could have been reversed. His conduct was so egregious that relief from forfeiture would be unlikely.

El-Amad v. Goldberg; Lawyers' Professional Indemnity Company (Third Party), [1997] O.J. No. 117 (Ont.Ct.Gen.Div.)


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