Republished with permission from the Insurance Brokers Association of Alberta’s magazine The Alberta Broker (June/July 2022).
With the ever increasing cost of owning a home or business property, having a mortgage through a bank or other lender is common. Mortgagees are entitled to certain protections for their monetary investments under various contracts and insurance policies, in case a building is damaged by fire or other cause, regardless of any misrepresentation, neglect or omission by the insured homeowner.
However, what happens when a mortgagee is not named or known at the time the insurance policy is entered into and there is no contract between the insurer and the mortgagee and a fire occurs destroying the mortgaged building? Can the actual mortgagee not named in the insurance policy rely on the standard mortgage clause to recover its monetary losses if the insurance policy has been voided ab initio by the insurer due to misrepresentations by the insureds?
The very issue and meaning of the words “the Mortgagee” in a standard mortgage clause in a homeowners insurance policy was recently decided by the Alberta Court of Appeal in Builders Capital (2014) Ltd. and 1053011 Alberta Ltd. v Aviva Insurance Company of Canada. (“Builders Capital”)[1]
In May 2014 a loan for construction of a home was obtained by Jakub Lesnik and Alicja Opach (“Lesnik/Opach”) from the Plaintiffs, 1053011 Alberta Ltd. and Builders Capital Inc., which later changed its name to Builders Capital (2014) Ltd. (“Builders Capital”). Repayment of the loan was secured by a mortgage collateral to a Promissory Note. The mortgage contained an insurance clause which required Lesnik/Opach to obtain insurance in favour of Builders Capital. Builders Capital received a copy of a home insurance policy issued to Lesnik/Opach by Security National Insurance Company (and later that policy was cancelled and replaced with a similar policy through The Mutual Fire Insurance Company of British Columbia). Both policies identified Builders Capital as the mortgagee. The policies also included the standard mortgage clause which was approved by the Insurance Bureau of Canada.[2]
The Mutual Fire Insurance Company of British Columbia policy was either cancelled or replaced without the knowledge of Builders Capital and a new insurance policy was taken out by Jack and Alicja Opach (“the Opach’s”) through Aviva Insurance Company of Canada (“Aviva”), which also contained the standard mortgage clause. However, unlike the earlier two policies, the mortgagee was listed as Royal Bank of Canada and not Builders Capital as the Opach’s thought they were going to refinance through the Royal Bank of Canada at the time of taking out the policy, which did not come to fruition. When the Opach’s later tried to add Builders Capital as a second mortgagee on the Aviva policy, Aviva refused and advised that they would cancel the policy if Builders Capital was added as a second mortgage holder. The Opach’s took no steps to obtain insurance coverage in which Builders Capital was named as the mortgagee.[3]
The standard mortgage clause as approved by the Superintendent of Insurance in the Aviva homeowners policy partially reads as follows:
1. Breach of Conditions by Mortgagor Owner or Occupant – This insurance and every documented renewal thereof – AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN – is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non-occupancy, or the occupancy of the property for purposes more hazardous than specified in the description of the risk….[4]
In May 2016, the Opach’s insured property was substantially damaged by fire. Aviva investigated and denied coverage and voided the policy ab initio on the basis of several misrepresentations by the Opach’s of material facts in their application for insurance, one of which misrepresentations was in relation to the proper identification of their mortgagee.[5]
In November 2016, Builders Capital filed a Statement of Claim against Aviva for the cost to repair the property, on the basis that the standard mortgage clause in the insurance policy permitted their ability to do so regardless of the misrepresentations by the Opach’s. Aviva denied the claim on the basis that Builders Capital was not a party to the Aviva insurance policy.[6]
The trial judge held that Builders Capital was not entitled to coverage under the Aviva policy. The judge reasoned that Aviva had never agreed to extend coverage to Builders Capital, given they were considered non-traditional lenders and a policy would not have been offered to the Opach’s in the first instance if this were known. Aviva also had specifically declined to add Builders Capital as a second mortgagee on the property. The judge also held that Builders Capital was not aware of the Aviva policy nor relied on it.[7]
Builders Capital appealed to the Alberta Court of Appeal (“Court of Appeal”) on the sole issue of whether the trial judge erred in interpreting the standard mortgage clause. They specifically relied on the Supreme Court of Canada’s analysis in National Bank of Greece (Canada) v Katsikonouris, [1990] 2 SCR 1029 to argue that the mortgage clause must be interpreted to include the actual rather than named mortgagee in the policy.[8]
The Court of Appeal, applying the principles of contractual interpretation as outlined by the Supreme Court of Canada in Progressive Homes Ltd. v Lombard General Insurance Co of Canada, 2010 SCC 33, held that the meaning of “Mortgagee” in the Aviva insurance policy was ambiguous.
To resolve the ambiguity about the meaning of the word “Mortgagee”, the Court looked to the reasonable expectations of the parties. Based on the facts before the Court, it was clear that Aviva did not expect, nor had they in any way, entered into a contract involving Builders Capital.[9]
The Court of Appeal determined that the “Mortgagee” referred to in the Aviva insurance policy could not mean Builders Capital, because the interpretation would lead to a commercially unreasonable situation which the parties would not have contemplated. The Court of Appeal upheld the trial judge’s decision and dismissed the appeal.
This decision provides helpful guidance and analysis on the operation and interpretation of the standard mortgage clause in a homeowners policy. It will be imperative for lenders or mortgagees to ensure they are named as mortgagees in policies of insurance to ensure the protection of the standard mortgage clause should a loss arise.
[1] Builders Capital (2014) Ltd. and 1053011 Alberta Ltd. v. Aviva Insurance Company of Canada, 2022 ABCA 120 (“Builders Capital”).
[2] Ibid., at paras 6 to 10.
[3] Ibid, at paras 13-15.
[4] Ibid, at para 12.
[5] Ibid, at paras 16-17.
[6] Ibid, at paras 18-19.
[7] Ibid, at paras 20-23.
[8] Ibid., at para 24.
[9] Ibid, at para 38.
