The Court of Appeal for Ontario has published a decision on a question with direct implications for the mortgage brokerage insurance market: when a licensed broker's principal misappropriates client funds held in trust pending a mortgage transaction, does the fraud endorsement on the broker's errors and omissions policy respond? The court allowed the appeal, reversing a summary judgment that had dismissed the clients' claim against insurer Sovereign General Insurance Company.

Mortgage financing deal leads to insurance dispute

The dispute arose in 2016, when Carmelo Calabrese, principal of two Ontario companies (“the appellants”), sought mortgage financing to purchase a student housing development property. The appellants dealt with Aztec Financial Corp. ("Aztec"), a licensed mortgage brokerage, and its principal, Barbara Romanow. Aztec introduced the appellants to a potential lender for approximately $6.75 million in financing.

As a condition of the proposed financing, the appellants deposited $350,000 USD ($459,975 CAD) with Aztec to demonstrate their financial capacity. The funds were to be held in trust and returned 19 days later.

Instead, Romanow removed most of the money from the account; that money was not returned. The remaining funds were frozen by Aztec's bank, Bank of Montreal ("BMO").

The appellants obtained a default judgment against Aztec and Romanow and recovered part of the money through garnishment. They subsequently sued Sovereign and BMO to recover the outstanding $353,520.92.

Under Ontario's Mortgage Brokerages, Lenders and Administrators Act, 2006 and its regulations, Aztec was required to carry errors and omissions insurance with extended fraud coverage of at least $500,000 per occurrence.

Aztec obtained a Mortgage Broker Errors and Omissions Liability Policy from Sovereign. The policy covered liability arising from wrongful acts in providing professional services. It excluded dishonest or fraudulent conduct, improper personal gain and losses involving funds in the insured's custody. However, the policy's endorsement for brokerages licensed in Ontario provided specific protection for dishonest or fraudulent conduct. The endorsement covered regulated mortgage brokerage activities and set a $500,000 limit per claim, matching the regulatory minimum. Section 49 of the Regulation requires brokerages to hold in trust funds received in connection with regulated mortgage activity.

In August 2025, Superior Court Justice John R. McCarthy dismissed the appellants' claim against Sovereign on summary judgment. The motion judge characterized the appellants' loss as arising from Aztec's failure to hold and return trust funds, rather than from a failure to advance or secure mortgage funds. He adopted the definition of "mortgage money" from s. 1 of the Mortgages Act, R.S.O. 1990— "money or money's worth secured by a mortgage" — and concluded that because the appellants' payment was not secured by a mortgage, it could not constitute mortgage funds. Although the motion judge acknowledged that his interpretation appeared inconsistent with the regulatory framework, he declined to rely on that framework in interpreting the policy.

The appellants appealed to the Court of Appeal for Ontario.

Trust funds or mortgage funds?

On appeal, the appellants sought recovery of $353,520.92 under Aztec's errors and omissions policy and again sought summary judgment in their favour. They argued the fraud endorsement applies because their money was provided to Aztec in connection with obtaining mortgage financing and constitutes "mortgage funds" within the meaning of the endorsement. The motion judge, they submitted, made two errors: he treated the trust character of the funds as mutually exclusive with their character as mortgage funds, and he severed the interpretation of the insurance contract from the regulatory regime under which the insurance was required.

Sovereign maintained that the policy does not respond. Sovereign argued that the policy's exclusions applied and that the fraud endorsement did not respond because the misappropriated money was held in trust rather than secured by a mortgage.

Regulatory framework shapes coverage interpretation

The Court of Appeal for Ontario identified the central question as one of contract interpretation, specifically, whether the fraud endorsement's reference to "failure to advance or secure mortgage funds" unambiguously encompasses the appellants' loss, and held that no deference is owed to the motion judge on that question. Citing Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016, the court confirmed that interpretation of a standard-form insurance contract has precedential significance beyond the immediate parties and is reviewable for correctness.

The motion judge erred at the first step by reading the endorsement in isolation from its regulatory context. The court identified the policy as anything but an ordinary private insurance arrangement: Aztec was required to maintain errors and omissions insurance with extended fraud coverage as a condition of operating as a licensed mortgage brokerage in Ontario. The regulatory scheme was part of the legal and commercial context in which the policy was issued. Where the language reasonably permits it, a court must favour an interpretation consistent with governing regulatory requirements over one that places the contract in conflict with them.

Read in that context, the court held, the phrase "failure to advance or secure mortgage funds" unambiguously encompasses the appellants' loss. "Mortgage funds," in the context of the endorsement, describes the connection between the money and the regulated mortgage activity to which the endorsement applies — not merely money secured by a mortgage. The motion judge erred by adopting the more restrictive definition of "mortgage money" from s. 1 of the Mortgages Act, whose interpretive context differs from that of the endorsement. Trust funds and mortgage funds are not mutually exclusive categories: the former describes the legal form in which money is held, the latter its connection to regulated mortgage activity — and section 49 of the Regulation itself requires a brokerage to hold such money in trust, so the trust status alone could not determine whether the funds were also "mortgage funds" within the meaning of the endorsement.

The court also found that requiring funds to be secured by a mortgage before coverage applies would deprive the word "secure" of independent meaning. In its ordinary sense — "keep safe from danger, harm, or loss" — Aztec failed to secure the mortgage funds when it dissipated them. The trust funds were provided to Aztec for the purpose of obtaining mortgage financing. By dissipating them, Aztec also failed to secure the contemplated mortgage financing — a direct connection between the fraud, the failure to secure financing, and the loss.

The court identified a further fundamental error: the motion judge severed the interpretation of the insurance contract from the regulatory regime pursuant to which it was required. There was no need to prove Sovereign had subjective knowledge of the regulatory requirements; the intention to comply is presumed objectively, and an insurer operating in a regulated market and issuing a policy designed to satisfy a mandatory provincial insurance requirement is reasonably taken to know them.

Sovereign's competing interpretation, the court observed, would produce a striking consequence: the regulatory requirement designed to safeguard client money would become the reason why the insurance intended to protect against fraud involving such transactions does not respond. The protection would be weakest precisely at the stage when client funds are most vulnerable to misappropriation — before the transaction closes.

The appellants' interpretation, by contrast, preserves reasonable limits: there must be a sufficient connection between the insured's fraudulent conduct and the failure to advance or secure funds linked to the broker's regulated mortgage activity.

The court added that any ambiguity would be resolved by interpretive principles reflecting the public-protection purpose of mandatory fraud insurance. The doctrine of contra proferentem would also favour the appellants, as Sovereign could have expressly drafted the limitation on coverage it sought to enforce.

The court rejected Sovereign's remaining defences, finding that alleged breaches of policy conditions had not been established and that the appellants were injured clients, not ordinary commercial creditors subject to the policy's creditor exclusion.

Insurer liable for $353,520

The appeal was allowed. The summary judgment granted to Sovereign and the order dismissing the appellants' action — issued by McCarthy J. on July 31, 2025 — are set aside. Summary judgment is granted to the appellants. Sovereign General Insurance Company is liable under the Mortgage Broker Errors and Omissions Liability Policy issued to Aztec Financial Corp. for $353,520.92, with applicable interest, representing the unpaid portion of the judgment obtained against Aztec Financial Corp. and Barbara Romanow.