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Insurance - Professional Liability. 2069586 Ontario Inc. v. Sovereign General Insurance Company
In 2069586 Ontario Inc. v. Sovereign General Insurance Company (Ont CA, 2026) the Ontario Court of Appeal allowed a plaintiff's appeal, this brought against the dismissal of a summary judgment action against the professional liability insurer of a mortgage broker - and grounded in misappropriation of trust funds.
Here the court considers the interpretion to be applied to professional liability insurance policies:a. The Regulatory Context Was a Relevant Surrounding Circumstance
[58] The step one interpretive analysis is holistic and contextual. Those principles assume particular significance here because this insurance was issued in a regulated industry and in satisfaction of a mandatory insurance requirement.
[59] That regulatory context is a relevant surrounding circumstance. Party intent to comply with the law is presumed. Contracts should thus be interpreted to meet the regulatory obligations which the parties expected them to fulfill. This “sensible and straight forward rule” respects both party intent and regulatory policy: Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis Canada Inc., 2020), at pp. 171-72; see also 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802, 122 O.R. (3d) 401, at paras. 13-15, leave to appeal refused, [2015] S.C.C.A. No. 43; Sir Kim Lewison, The Interpretation of Contracts, 8th ed. (London: Sweet & Maxwell, 2024), at para. 4.41.
[60] This rule applies to insurance contracts. An early case addressed an auto insurance policy in a regulatory context where it was an offence to drive without third-party insurance. The judge held that the parties must have intended for the policy to comply with the law: Digby v. General Accident Fire and Life Assurance Corp. Ltd., [1943] A.C. 121 (H.L.), at p. 141. A later case ruled that “abundantly clear” language is needed to rebut the expectation of intent-to-comply: Laurence v. Davies, [1972] 2 Lloyd’s Rep. 231 (Crown Ct.), at p. 233.[1]
[61] The principle is particularly apposite where, as here, the contract exists because the governing regulatory regime requires it: R&S Pilling t/a Phoenix Engineering v. UK Insurance Ltd., [2019] UKSC 16, [2020] A.C. 1025, at para. 24. Sovereign was not issuing an optional form of insurance to an unregulated commercial enterprise. It was insuring a licensed Ontario mortgage brokerage required by provincial law to maintain E&O insurance that included extended protection against fraud.
[62] The regulatory requirements governing that insurance thus formed part of the legal setting in which the policy was issued. Breaching those requirements is an offence. Like in Digby and Laurence, party intent to comply with them is expected absent clear language to the contrary.
[63] There is none here. Instead, the endorsement demonstrates intent to comply. It acknowledged Aztec’s status as a regulated actor, defined the professional services covered coextensively with Aztec’s regulated mortgage-related activity, matched the Regulation’s mandatory policy limit, and blocked Sovereign from reducing that limit without first notifying the regulator.
[64] This regulatory context is important not simply because it exists, but because of what the insurance requirement was intended to accomplish.
[65] Mortgage brokers occupy a position of significant financial trust: 713860 Ontario Ltd. v. Royal Trust Corp. of Canada (1996), 1996 CanLII 7956 (ON CTGD), 27 O.R. (3d) 559 (Gen. Div.), at p. 575, aff’d (1999), 1999 CanLII 2577 (ON CA), 43 O.R. (3d) 159 (C.A.). Borrowers, lenders, and investors may transfer substantial amounts of money to a brokerage in anticipation of a transaction that has not yet closed.
[66] That creates an obvious vulnerability. The person entrusting the funds may have little practical control over them once they enter the brokerage’s possession.
[67] The regulatory scheme responds to that risk through complementary protections. It regulates how mortgage brokerages receive and hold client money. It requires funds received in specified circumstances to be held in trust. And it requires brokerages to maintain E&O insurance with extended fraud protection that fraud victims can directly enforce. See Regulation, ss. 42, 49-55; Guidelines, ss. 10, 13.
[68] Those protections serve related purposes. The trust requirements seek to prevent misuse of client money. Mandatory fraud insurance addresses the consequences when prevention fails.
[69] The insurance requirement, therefore, serves more than the private interest of the insured brokerage. It has an important public-protection function. In fact, of all the standards of practice, it is the one that “most clearly and directly protects the public”: 6874843 Canada Ltd. (Panamerican Mortgages) v. Ontario (Superintendent Financial Services), 2012 ONFST 23, at para. 5.
[70] That conclusion is reinforced by the Guidelines. They promise direct recovery. They guarantee “additional coverage for loss resulting from fraudulent acts”. That requirement, they emphasize, “protect[s] the public”.
[71] The point should not be overstated. Mandatory E&O insurance does not transform the insurer into a guarantor of every loss caused by a mortgage broker. Coverage remains governed by the language of the policy and the regulatory scheme.
[72] But neither should the public-protection purpose be understated. Where the mandated fraud endorsement is reasonably capable of an interpretation that affords meaningful protection to the public, the regulatory purpose is a legitimate and important interpretive consideration. It favours constructions which achieve that purpose over those that substantially defeat it: Unique Broadband Systems, Inc. (Re), 2014 ONCA 538, 121 O.R. (3d) 81, at paras. 87, 95-97, 104.
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b. Considering the Regulatory Context Was Mandatory
[73] Because the regulatory context is a relevant surrounding circumstance, the motion judge was required to consider it at step one: Lakeshore, at paras. 13-15; SIR Corp., at para. 41. The procedural considerations relied upon by the motion judge and Sovereign do not justify excluding that context.
[74] First, no declaration of regulatory non-compliance was required. The appellants did not seek to have the policy invalidated or reformed. Their position was that the existing language should be interpreted, where reasonably possible, consistently with the governing regulatory requirement. This distinction between rewriting a contract to achieve regulatory compliance and interpreting its text consistent with the governing regulatory regime is fundamental. The former is generally impermissible. The latter, as I have explained, is an orthodox principle of contract interpretation which applies to insurance contracts: Lewison, at para. 4.41.
[75] Second, it was unnecessary to prove that Sovereign subjectively knew of or notified the regulator of its intent to comply with the regulatory requirements. The interpretive context is objective, and intent to comply is presumed absent evidence to the contrary: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 58; Digby, at p. 141. There is none here. Sovereign issued insurance to a licensed mortgage brokerage in a regulated Ontario industry. An insurer participating in a regulated market and issuing a policy designed to satisfy a mandatory provincial insurance requirement reasonably must be taken to know the requirements governing that insurance. Indeed, Sovereign’s own policy referenced them. It was, therefore, an error to treat the regulatory scheme as irrelevant unless the appellants called additional evidence to prove that Sovereign subjectively acknowledged it or specifically undertook to comply with it.
[76] Third, the regulator’s participation was not required. Considering the regulatory scheme as part of the legal context in which a contract operates does not make the regulator a necessary party to a private contract dispute.
[77] Fourth, the regulatory context is not a new issue on appeal. The endorsement references it, both parties pleaded it, the appellants’ affidavit included it, the appellants raised it before the motion judge, and he expressly dealt with it in his reasons. It is, therefore, properly before this court.
[78] Finally, Sovereign’s assertion that it received regulatory approval to offer reduced coverage cannot assist it on the record before us. The material relied upon for that proposition was not admitted into evidence before the motion judge and is not before this court as fresh evidence.
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[113] There must be a sufficient connection between the insured’s fraudulent conduct and a failure to advance or secure monies linked to the brokerage’s regulated mortgage-related activity. That requirement preserves the policy’s E&O focus and prevents it from morphing into fidelity insurance: Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at paras. 23-24.
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