What happened: Ontario's Court of Appeal ruled a client deposit held in trust still counted as "mortgage funds."
Who's involved: Sovereign General Insurance Company; its insured, Aztec Financial Corp.; a construction businessman and his two companies.
What's at stake: $353,520.92 in unpaid judgment, plus interest, under a $500,000 per-claim fraud endorsement limit.
Why it matters: Holding client money in trust did not take it outside a mandated fraud endorsement, the court said.
Where it stands: Decided September 24, 2026: appeal allowed, summary judgment entered against the insurer.
The deposit was supposed to come back in 19 days, with no interest and no deductions.
In 2016, a construction businessman and his two companies went looking for a mortgage to buy a student housing development property. The proposed financing was about $6.75 million. The financing came with a condition. They had to put up $350,000 in US dollars, or $459,975 in Canadian dollars at the time, to show they could fund a major transaction.
The money went to Aztec Financial Corp., a licensed Ontario mortgage brokerage, to be held in trust. The financing did not proceed. According to the Court of Appeal for Ontario's reasons, Aztec's principal had removed most of the money from the account. It did not come back.
Aztec's bank froze what was left.
The court described the depositors as "victims of a fraud" committed by Aztec and its principal. Neither defended the lawsuit, and the depositors won judgment against them by default.
The depositors recovered part of that judgment from the frozen funds. The court put the unpaid balance at $353,520.92.
Trust money, or mortgage money?
So the depositors turned to Aztec's insurer, Sovereign General Insurance Company, and the mortgage broker errors and omissions policy it had issued. Ontario's regulations required Aztec to carry that cover, including extended protection for losses from fraudulent acts, of at least $500,000 per occurrence.
The policy generally shut the door on dishonest or fraudulent conduct, and on loss of money in the insured's care or custody. But an endorsement for Ontario-licensed brokerages opened it again in specific cases. It covered an insured's legal liability to a third party for a "failure to advance or secure mortgage funds" caused by a "dishonest or fraudulent act."
Sovereign's position was that the deposit was not "mortgage funds." It was "trust funds." The lower-court judge agreed.
He also used the definition from a different statute, the Mortgages Act, where mortgage money means "money or money's worth secured by a mortgage." The deposit was not secured by a mortgage, so the endorsement did not apply.
The appeal court disagreed.
Trust money and mortgage money can be the same money, the court said. The regulations require a brokerage to hold money from its mortgage business in trust. Sovereign's reading would have made the rule that protects client money the reason the fraud cover never kicked in.
The court also said the lower court was wrong to set the regulations aside when reading the policy. This insurance existed because the law required it, and people are presumed to intend to follow the law. So when the wording allows, the reading that fits the regulations beats the one that clashes with them.
The endorsement pointed the same way. Its $500,000 limit matched the regulation's minimum, and Sovereign could not cut that limit without giving the regulator 30 days' notice.
The endorsement covered a failure to "advance or secure" mortgage funds. Advance covers rolling out financing that has already been obtained. Secure covers the earlier step of landing the financing in the first place.
The depositors handed over the money only because the financing required it. Without the proposed financing, the court said, there would have been no deposit and no trust arrangement.
Timing matters here. Before a mortgage closes, clients can hand over large sums when no mortgage is registered yet. Under Sovereign's reading, that stage would go uncovered, and the cover would be at its best only once much of the risk was behind it.
Even under the lower court's narrower definition, the result would be the same, the court said. The deposit was paid to secure the financing, and the financing was not secured.
Sovereign warned that this reading would turn the policy into blanket cover for every fraud by a mortgage broker. The court did not agree. The endorsement does not apply just because the wrongdoer is a broker, it said, and not every dollar passing through a brokerage becomes "mortgage funds."
What counts is a real link between the dishonest conduct and a failure to advance or secure money tied to the brokerage's mortgage work. That depends on the deal. Here, the court found the link direct.
The court set aside the earlier ruling for Sovereign and gave the depositors judgment without sending the case to trial. It declared Sovereign liable to cover the unpaid $353,520.92, plus interest.
Sovereign had also raised alleged failures by Aztec and its principal on notice, cooperation and other policy conditions. Those did not rescue the earlier ruling, the court said. The lower court had not relied on them, and Sovereign had not established them on the record.
Only clear language could put pre-closing client deposits out of reach of the mandated fraud cover, the court said, and Sovereign's policy had none.
