SCC Addresses Vacancy and Standard Mortgage Clause

The Insurance Bureau of Canada has issued a "Standard Mortgage Clause" the purpose of which is to ensure that the mortgagee’s interest in the insurance is "in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured including any vacancy or non-occupancy . . .".

Hence, if the insured abandons the property, whether in the course of a foreclosure process or otherwise, and does not advise the insurer of the vacancy, then even though the insured has breached the policy condition obliging him to provide prompt written notice of any material change in risk, the mortgagee (the bank) is nonetheless protected in the event of a fire or any other insured loss.

But what if the bank itself is aware of the vacancy and doesn’t tell the insurer? Can the insurer deny coverage to the bank in such circumstances? This is the question that was addressed in the Supreme Court of Canada’s June 2005 decision in Royal Bank of Canada v. State Farm Fire & Casualty Co.

The Standard Mortgage Clause does actually impose a reporting obligation upon the mortgagee: “provided always that the mortgagee shall notify forthwith the insurer (if known) of any vacancy or non-occupancy extending beyond 30 consecutive days . . .”. However, unlike Statutory Condition 4 respecting unreported material changes in risk, the clause does not itself expressly provide that any failure to report the vacancy will void coverage.

The Ontario Court of Appeal held that, in addition to any obligations imposed by the Standard Mortgage Clause, the mortgagee was bound by Statutory Condition 4 of the policy and that the bank’s failure to report a vacancy voided coverage.

The Supreme Court of Canada unanimously overturned the decision. It held that there was indeed a conflict between the Standard Mortgage Clause and the Statutory Condition and that the latter could not be relied upon by the insurer to avoid coverage in the circumstances. Even if vacancy amounted to a material change in risk, voiding coverage would “defeat the insurer’s promise contained in the Mortgage Clause of continued coverage in the event of a vacancy”. It further commented:

The bottom line, then, is that even if the bank is aware of the vacancy of the insured property and does not report it to the insurer, it can nevertheless enforce coverage under the Standard Mortgage Clause in the event of a loss by fire. If insurers want to void coverage in such circumstances, they must expressly reword the Standard Mortgage Clause to that effect.

The full decision in Royal Bank of Canada v. State Farm Fire & Casualty Co. is available on the Supreme Court of Canada’s website.

Readers who have a question on the Standard Mortgage Clause or any other aspects of property coverage are invited to contact Nigel Kent at npk@cwilson.com (e-mail) or 604-643-3135 (direct dial). Other recent cases and issues of interest are also addressed in the paper “Problems with Property Policies: Recent Developments Regarding Commercial and Residential Coverage”.