Newsletters

116

Standard Mortage Endorsment: Is it a Shield for the Creditor?

The scope and protection afforded to a mortgage creditor by the standard mortgage endorsement was again analyzed by the Court of Appeal in Roma Capital inc. 2023 QCCA 307.

It should be noted that in this decision rendered on March 7, 2023, the Court of Appeal was hesitant since the decision was rendered on a two-to-one basis.

Background

In February 2017, Roma Capital Inc (the Lender) granted the insured a mortgage loan of $220,000.00 for the purchase of a building located in Berthierville. A condition of the loan was to subscribe to a home insurance policy naming the Lender as mortgagee. The policy as issued contained a standard mortgage guarantee clause approved by the Insurance Bureau of Canada. The insured was planning to renovate the building and the insurer authorized her to leave it vacant for one year and issued an endorsement to that effect to the policy. A few months later, in May 2017, the building was destroyed by fire. The insurer refused to indemnify both the insured and the Lender. The insurer’s refusal was based on the application of an exclusion for vandalism even when the building was vacant with the insurer’s authorization. The trial judge was of the opinion that the fire, resulting from an intentional and wrongful act, was an act of vandalism leading to the application of the exclusion provided in the policy. Furthermore, the judge held that the vandalism exclusion is enforceable against the lender notwithstanding the mortgage guarantee clause.

The decision was appealed by the Lender and in a split decision, the Court of Appeal agreed, overturning the judgment and ordering the insurer to pay the mortgagee the balance of its claim.

It is well known that the standard mortgage endorsement (Mortgage Guaranty Clause) is a separate contract between the insurer and the creditor rendering unenforceable against the creditor “the acts, negligence or declarations of the owners, tenants or occupants of the secured property, particularly with respect to transfers of interest, vacancy, unoccupancy or use of the premises for purposes more dangerous than those declared.’’

In addition, this Mortgage Security Clause provides that the terms thereof “shall otherwise prevail as to the interests of the mortgagees against all provisions of the contract.’’

Justice Kalichman of the Court of Appeal, dissenting, noted that in this case, the vacancy had been authorized by an endorsement and it was the vandalism exception that the insurer was invoking. For this appeal judge, “The fact that the vandalism occurred while the building was vacant is irrelevant.” Therefore, the vandalism exclusion did not conflict with the terms of the Mortgage Guaranty Clause and, in his view, the first judge did not err in this regard in ruling that the vandalism exception was enforceable against the Lender.

Justices Hogue and Beaupré, however, were of the contrary opinion.

First, the majority opinion noted that, apart from the Mortgage Guaranty Clause, vandalism is a risk covered by the policy unless it occurs during a vacancy, in which case the resulting damage is not covered and no indemnity is payable.

However, the majority of the judges underlined that it is well established that clauses in an insurance policy that are inconsistent with the Mortgage Security Clause contained therein, including exceptions, are unenforceable against the mortgagee. This clause constitutes a separate contract between the insurer and the mortgagee “for which it provides broader coverage” and whose provisions, as we have seen, prevail over those contained in the policy.

According to Justice Hogue, writing for the majority, the exclusion for losses occurring during a vacancy of more than 30 days is indistinguishable from those excluding coverage for vandalism occurring during a vacancy. In the judge’s view, the exception in both cases arises from the fact that the building is vacant. The mortgage guaranty clause specifically provides that the acts of the owners (…) “particularly with respect to (…) vacancy” are not enforceable against the creditor. As a result, by invoking the exclusion, the insurer is indirectly opposing to the mortgagee an act of the insured concerning the vacancy. Finally, according to the majority opinion, the insurer’s authorization of the vacancy but reiterating the vandalism exclusion does not change the situation since the provisions of the Mortgage Guaranty Clause prevail over any inconsistent provisions of the policy and particularly over the endorsement authorizing the vacancy. At best, taken as a whole, the result is that the insurance contract between the insurer and the Lender would be ambiguous and therefore should be interpreted in favor of the Lender.

116

Authors

Patrick Henry

Lawyer, Partner

Articles in the same category

Company found guilty of criminal negligence causing death of its truck driver

Last August 11, the Quebec Court of Appeal dismissed the appeal and upheld the trial judge’s decision finding CGF Construction Inc. (the “employer”) guilty of criminal negligence causing death1. The victim in question, a truck driver with over 25 years’ experience, died after losing control of the employer’s heavy container truck, which flipped over on […]

The « appropriate care » provision in disability insurance: an application bearing heavy consequences for the insured

In Desjardins Sécurité financière v. Hébert, the Court of Appeal reminds us of an essential condition often overlooked in order to claim disability insurance benefits: the obligation to be under the care of a medical team and to receive medical treatment, a contextualization of the obligation to mitigate one’s damages. The Court also considers the […]

“Teleworking”: now and forever?

“I’d like to make a job offer to this candidate. The work will be performed remotely, from home. Can I change this condition at a later date?” In a decision rendered on 16 March 2023, the Administrative Labour Tribunal confirmed that employers have management rights that allows them to require their employees to return to […]

Fraudulent Statements: Still a Question of Credibility

In Paul-Hus c. Sun Life, Compagnie d’assurance-vie, 2023 QCCS 3890, the Superior Court reminds us of the importance of answering questions truthfully and completely when taking out an insurance policy. Faced with the question of whether the insured intended to deceive the insurer, the Court’s analysis shows that credibility remains a key element. Facts On March […]

Can an insured have one’s cake and be indemnified for it too?

The Sainte-Rose-du-Nord1 decision rendered by the Superior Court presents an interesting scenario that arose in the context of a Wellington motion. The Facts: The Municipality of Sainte-Rose-du-Nord (the “Insured“) held two civil liability policies issued by the Fonds d’assurance des municipalités du Québec (the “Insurer“), one for general liability and the other for errors and […]

Law 25 : an Act to modernize legislative provisions as regards the protection of personal information

Important amendments will be applicable as of September 22, 2023 Law 25 amends the Act respecting the protection of personal information in the private sector (hereinafter the “Act”), applicable to companies in the private sector. While Law 25 itself came into force on September 22, 2022, the most important amendments will come into force as […]