About real estate undertakings and exclusions in the professional liability policy
Rule 7.2-11 of the Rules of Professional Conduct deals with lawyers’ undertakings and trust conditions. That Rule says that a lawyer “shall not give an undertaking that cannot be fulfilled and shall fulfill every undertaking given and honour every trust condition once accepted.” In real estate transactions using the system for electronic registration of title documents (“e-reg”), the lawyers acting for parties (with their consent) will sign and be bound by a Document Registration Agreement that will contain undertakings. The commentary under the Rule once again reminds lawyers that they must never give an undertaking that they cannot fulfill.
The LAWPRO policy contains several exclusions to coverage and one of these exclusions deals with the issues of undertakings. Part III (f) says that the policy does not apply:
to any CLAIM in any way relating to or arising out of any undertaking, agreement or promise by an INSURED, in which the INSURED assumes responsibility for the INSURED’S own or another’s performance of an undertaking, agreement, promise or payment of a debt, including but not limited to an OVERDRAFT relating to or arising out of a COUNTERFEIT CERTIFIED CHEQUE(S) OR COUNTERFEIT BANK DRAFT(S)
The exclusion is interpreted in the context of Rule 7.2-11. Whether a claim arising out of a failure to fulfill an undertaking is covered will depend on whether or not the lawyer was in a position to fulfil the undertaking when it was given. For example, a lawyer has $10,000 in their trust account to be used to pay tax arrears, and on closing of the transaction gives a personal undertaking to transfer those funds to the Municipality. After closing, there is a bookkeeping error and inadvertently the funds are released to the client, the taxes are not paid and the client then leaves the country. There will be a claim from the vendor against the lawyer based on their personal undertaking. That claim would be covered because at the time the lawyer granted the undertaking they were in a position to fulfill it. The reason that they did not fulfill it was that the lawyer or someone in the office was negligent and mistakenly released the funds to the wrong party.
If, however, a lawyer gave that same undertaking when they did not have the client funds in the trust account, the claim would not be covered. The lawyer has given a personal undertaking and agreed to pay someone else’s debt. They have taken a personal risk, hoping that ultimately the client would come forward and pay the $10,000. If the client does not pay and a claim is made it would be excluded under the policy because the insured assumed responsibility for another’s performance of an undertaking or payment of a debt.
Lawyers’ undertakings are now, and always have been essential to the practice of law and as long as they are given in good faith, the policy will respond to claims arising out of the giving of those undertakings. Therefore, as long as lawyers continue to heed the Rules and do not give undertakings that cannot be fulfilled, any claim arising out of the undertaking will be covered under the policy.
About electronic registration and Innocent Party coverage
What is the protection afforded by LAWPRO’s Innocent Party liability insurance coverage to purchaser clients in an e-reg closing?
As its name implies, Innocent Party coverage protects members of the public – and thereby lawyers carrying this coverage – against the dishonest, fraudulent, criminal or malicious acts or omissions of lawyers, their present or former partners, associates, employed lawyers or firm employees with whom the lawyer practises or once practised. It thus enables members of the bar to assure clients that they [clients] are protected against the dishonest, fraudulent, criminal or malicious acts or omissions of lawyers. The minimum Innocent Party coverage of $250,000 per claim/in the aggregate is mandatory for all lawyers practising in association or partnership, and optional for sole practitioners. Higher coverage limits may be available from LAWPRO.
However, any Innocent Party coverage that you may have in place will not protect your client if the other lawyer (or lawyer’s staff member) acts dishonestly and your client suffers a loss as a result. (For example, you may have provided the purchase funds in escrow to another law firm, and the lawyer absconds with the funds without releasing the transfer for registration.)
Therefore, as an added measure of service, you may want to ensure that Innocent Party protection is carried by opposing counsel for the protection of your clients in an e-reg transaction. Evidence that this coverage is in place can come from several avenues: The Declarations page that details the professional liability coverage provided to counsel by LAWPRO is one source; you can also ask counsel to certify in writing the level of Innocent Party coverage in place, or obtain from them a direction authorizing LAWPRO to disclose to you the level of Innocent Party coverage in place.
Note that this coverage is provided on a claims-made basis only, and therefore is the coverage in place only at the date on which the Declarations page is issued or when LAWPRO makes the disclosure. So you may want to verify at least annually that counsel with whom you are transacting business continue to have in place Innocent Party coverage, and the amount of the coverage.
Impact of Acknowledgment & Direction
Also remember that upon signing the Acknowledgment & Direction generated by the e-reg software, the client instructs you to close in escrow pursuant to the Document Registration Agreement. A copy of that agreement is attached to the Acknowledgment & Direction.
About e-reg and LAWPRO’s position on claims deductibles
The real estate bar has been concerned about the need to verify the reliability of the other lawyer(s) in the transaction, and the possibility that some firms could consequently refuse to do escrow closings with firms (based on lack of knowledge and trust of the other parties).
LAWPRO will not require payment of the deductible, or impose a claims history levy surcharge, where a claim is brought against a member due to a purported breach of the DRA by the opposing counsel during the escrow closing.
There are two versions of the DRA, one for two parties, and another for three or more parties. Both versions are otherwise identical and are available on the LSO website.
Members of the bar have questioned the need to verify the grounds used by the other lawyer in the transaction to make a compliance with law statement.
LAWPRO believes there should be no need for a lawyer (with no adverse knowledge) to verify statements made by opposing counsel, even if the compliance with law statement is being made to close a pending transaction as opposed to a historic transaction.
LAWPRO therefore will waive any deductible and claims history levy surcharge in situations where a negligence claim is brought against a lawyer who innocently relied on the compliance with law statement made by the lawyer representing the other party(ies).
In the e-reg environment, it is lawyers, not clients themselves, who sign the documents for registration. This raises concerns that lawyers can be held accountable for factual statements made by clients (such as confirmation of age, spousal status) when the lawyer does not personally know if the information provided by the client is correct.
Section 57 of the Land Titles Act states that a person on whose application an erroneous registration is made is open to a claim by the person wrongfully deprived of land by reason of that entry on the register.
LAWPRO believes the following two measures help to “bullet-proof” lawyers on this issue:
- The Acknowledgment generated by the e-reg system confirms the answers given to the software, and should be signed by the client before closing. Therefore, the likelihood of the client making a mistake or denying giving information after the fact is minimized.
- Section 40(3) of O. Reg. 19/99 under the Land Registration Reform Act states that, in terms of factual statements, the lawyer is deemed not to be the person on whose application the registration is made, making the client primarily responsible for any such errors.
Please ensure that your clients sign the Acknowledgments. If the Acknowledgment generated by the software does not cover any parties who would traditionally have signed the document, please consider alternate ways to evidence the party’s consent.