A title insurance policy protects the homeowner from damages arising out of certain title defects that were not discovered before the closing of the purchase transaction. One of the types of losses that are usually covered by an owner’s title insurance policy is the unmarketability of title. The marketability of title is the absence of any material defects in the title. The question of whether the antecedent construction defects can lead to the unmarketability of title was considered by the Ontario Court of Appeal in MacDonald v. Chicago Title Insurance Company, 2015 ONCA 842 (MacDonald) and Breen v. FCT Insurance Company Ltd., 2019 ONCA 598 (Breen).

In MacDonald, the homeowners sought a declaration that their title insurance policy provided coverage and indemnification for a dangerous structural condition affecting their home. That condition was caused by unpermitted construction done by a previous owner. The Court of Appeal found the title insurer liable because the dangerous condition of the property made the homeowners’ title unmarketable. Therefore, the Ontario Court of Appeal in MacDonald equated “marketability of the property” with “marketability of title”.

In Breen, however, the Ontario Appeal Court found a distinction between situations where the land is unmarketable and where the title is unmarketable. In Breen, the owners of the cottage constructed with significant structural defects sought recovery of these costs against their title insurer, arguing that the title insurer was liable under the general obligation to insure “marketable title”. The Court of Appeal in Breen found that the defects would not then be an issue regarding the marketability of the title. The homeowner had an issue with the marketability of the land but not with the marketability of title.

The Appeal Court in Breen states that 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.

The Appeal Court in Breen found two fundamental differences between that case and MacDonald. First - the homeowner in 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. By contrast, central to the conclusion in MacDonald was the fact that there was no reason for the purchasers, or their real estate lawyer, to know that construction (demolition) had been undertaken without a building permit. Consequently, there was no reason for the real estate lawyer to make any inquiries in that regard. The second distinguishing fact is that in Breen, further investigations of public records before closing would not have changed because the structural defects were never discoverable by the off-title searches. Nevertheless, in MacDonald, a further inquiry would have revealed the property defect (the absence of a building permit).

Therefore, according to the case law in MacDonald and Breen, title insurance protects only against construction defects that would be revealed by off-title searches; the title insurance does not protect against property defects that would not be disclosed by such searches.

Please feel free to contact one of our lawyers should you have any questions about this topic.