Lenders must be listed as a Loss Payable to obtain insurance coverage.

The Court of Appeal of Alberta recently decided that Mortgagees or mortgage lenders have to be prudent in ensuring that they have written confirmation under their borrower’s insurance policy, that they are listed as a loss payable, instead of merely relying on the standard mortgage clause to think there is protection for them under the insurance policy.

In a unanimous decision, the Court of Appeal panel in Builders Capital (2014) Ltd v Aviva Insurance Company of Canada 2022 ABCA 120 agreed with the trial judge by holding in that case, despite any ambiguity behind the meaning of the phrase “the Mortgagee” in the standard mortgage clause included in the borrower’s insurance policy, based on the general rules of contract construction and the reasonable expectations of the parties, the term “the Mortgagee” only referred to the one Lender listed as loss payable on the policy and not all Lenders listed on title to the property.

The appellant mortgagees in this case only relied on the standard mortgage clause in the insurance policy and did not take further steps to confirm with the insurer that they were listed as a loss payable.   The Court of Appeal held that they did not have any coverage under the insurance policy because they were not listed as a loss payable under that policy.  This case cautions all Mortgagees that merely relying on standard mortgage clause in an insurance policy is not enough.  It cannot be assumed that just because there is a standard mortgage clause in a borrower’s insurance policy, that every mortgagee listed on title to the property will be covered under that policy.

For Mortgagees to properly allocate and avoid risk, additional steps must be taken such to ensure that they are listed as a loss payable under an insurance binder letter and that their name and address is correct.    While not directed in the case, the Mortgagee should also ensure that the policy is paid for and not expiring in the next 30 days.

This case tells us that the Standard Mortgage Clause does not automatically make a contract or connection between an insurer and any one mortgagee. The Mortgagees must make it clear to the insurers of the property that they seek to be covered under the insurance policy by providing the insurer with its contact information, its request to be listed as a loss payable under the policy, and to obtain confirmation in writing, from the insurer, that they are covered. Failing to do so and merely relying on a Standard Mortgage Clause will open the Mortgagee to the risk that their claim for coverage would be denied, leaving them with no further recourse for an insured peril loss

The pertinent facts of the case and summary of the decision is set out below:

• There was a material misrepresentation in application for insurance, which entitled the respondent insurer to void coverage
• On May, 2016, the residential property was damaged by fire
• Builder’s Capital sought to recover losses under the standard mortgage clause, which preserves coverage for “the Mortgagee” notwithstanding any misrepresentation attributable to or by the mortgagor.
• The Respondent insurer denied appellant’s claim on basis that the only mortgagee that the respondent was asked to insure was the Royal Bank of Canada (“RBC”) and not Builder’s Capital.
• The Trial Judge agreed with the insurer, finding that there was no insurance contract between the respondent and Builder’s Capital. The Trial Judge also found that there was no evidence that Builder’s Capital was aware of the respondent insurer, Aviva or that it relied on Aviva’s policy, in advancing their mortgage proceeds.
• Builder’s Capital appealed on the basis that the Trial Judge interpreted the term “the Mortgagee” too narrowly and should include all Mortgagees registered on title pursuant to the Standard Mortgage Clause contained in the policy of insurance.

Based on the evidence provided, the Appeal Judges agreed with the trial judge and found that at the time the insurer agreed to underwrite the policy, the insurer’s knowledge was that RBC was the on Mortgagee on title.  RBC provided the insurer with its full name and address which was shown on the insurance binder letter.   What made this worse for Builder’s Capital was that the insurer considered them to be a non-traditional Mortgagee.   Based on conversations between the broker and the insurer, the Court also considered that when requesting to add the Builder’s Capital  as a second Mortgagee to the insurance policy, the insurer never agreed to extend coverage to Builder’s Capital, and would have cancelled the insurance if Builder’s Capital was required to be added as a second Mortgagee.   This was all known prior to the Builder’s Capital advancing funds.

The Court used the general rules of contract construction in deciding what the parties’ understanding of the insurance policy coverage was. The Court noted that the word Mortgagee was capitalized throughout the Standard Mortgage clause, which signifies a specific mortgagee rather than any mortgagee.  Further, when looking at the responsibilities of each party. the Court observed the difficulty in situations of a loss to expect the insurer to send notices of the loss to Mortgagees that it was not aware of.  The Court decided that a broad interpretation of the phrase “the Mortgagee” would not work given the commercial reality that some equitable mortgage interests may not be registered on title.