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. That Rule says that a lawyer shall not give an undertaking that cannot be fulfilled, 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 Professional Liability 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 their own or another’s performance of an undertaking, agreement, promise or payment of a debt
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 the lawyer verified that they were 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 had verified that 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.
If a lawyer had funds held in trust to pay a debt, gave an undertaking to pay a debt, but failed to verify the amount of the debt and the funds in trust are deficient, the inability to fulfill the undertaking would not be covered in the normal course. Likewise consider the scenario where a lawyer has more than ample funds to pay the debt, but fails to take steps to determine the exact amount owing that is the subject of the undertaking. Without verifying the debt, the lawyer releases some of the funds to another party and only later realizes that while the lawyer had sufficient funds when the undertaking was given, is now no longer able to pay the debt in full and satisfy the undertaking. In such cases, the lawyer’s failure to properly identify the nature of the undertaking and what would be required to satisfy it can result in personal exposure for the lawyer.
Undertakings are essential to the practice of law, and the policy will respond to claims arising out of undertakings that are given in compliance with Rule 7.2-11. Accordingly, for coverage to be available, lawyers must, prior to giving the undertaking, independently and personally complete all necessary due diligence to satisfy themselves as to what is required to fulfill the undertaking and that they can fulfill it.
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.