By Bo Carter
Most property insurance policies include a one-page document, in relatively fine print, that has a huge impact on whether insurance monies are payable under a Policy: The Standard Mortgage Clause. This will see insurers on the hook to make a payment under the policy to a mortgagee, even if the Insured has done something that would render the policy void. This includes if the Insured made a misrepresentation or omission on their application for insurance, did not advise the insurer of a change in material risk, or left the property vacant (even if the mortgagee is aware of the vacancy). However, recently the Alberta Court of Appeal in Builders Capital (2014) Ltd v. Aviva Insurance Company of Canada, 2022 ABCA 120 [Builders Capital] held that being the actual mortgagee is not, on its own, enough to be a mortgagee under the Standard Mortgage Clause.
A mortgagee is able to collect under an insurance policy, even if it is void ab initio (that is, void from inception) due to an insured’s misrepresentation or omission, based on the concept confirmed by the Supreme Court of Canada in National Bank of Greece (Canada) v. Katsikonouris,  2 S.C.R. 1029 (S.C.C.) [Katsikonouris], that Standard Mortgage Clause creates a separate contract, between an insurer and the mortgagee, from the contract of insurance between the insurer and the insured. Importantly, this separate contract remains in force despite any “act, neglect, omission or misrepresentation attributable to the mortgagor.”
Therefore, as the Standard Mortgage clause creates a separate contract between the mortgagee and the insurer, essentially unaffected by the insured’s actions or inactions, the crux of the question of whether an entity can take advantage of the Standard Mortgage Clause is whether it is a mortgagee. Often the answer is straight forward because the policy will list the entity as a mortgagee, and the mortgage will be registered on the property’s title. However, there are cases where it is not clear who is a mortgagee for the purposes of the Standard Mortgage Clause because either the entity is listed as a mortgagee under the policy, but there is no registration of the mortgage on title, or because the entity is not listed as a mortgagee on the policy.
If an entity is listed as a mortgagee on the policy, but not registered as a mortgagee on title, then further inquiry is required to establish that the entity is in fact a mortgagee. The courts have recognized that an entity can be an equitable mortgagee and still make a claim under the Standard Mortgage Clause: Wiseman’s Sales and Services Limited v. Atlantic Insurance Company Ltd., 2007 NLCA 15. Moreover, courts have also recognized that the Standard Mortgage Clause does not only apply to realty, but that an entity can be a mortgagee of a chattel, and claim under the Standard Mortgage Clause: Business Development Bank of Canada v. Dominion of Canada General Insurance Co., 1998 ABQB 437 (CanLII). Therefore, to be a mortgagee for the purpose of taking advantage of a Standard Mortgage Clause, an entity does not need to have a registered mortgage on the property’s title, but can be an equitable mortgagee which can include being a mortgagee under a chattel mortgage.
However, establishing that an entity is a mortgagee is likely insufficient, on its own, to establish that the entity can take advantage of the Standard Mortgage Clause. That is the case even if it is registered on title as mortgagee, was the actual mortgagee at the time of issuance of the policy, and was left off the policy by mistake. This was the scenario in Builders Capital.
In Builders Capital, a residential property was damaged by fire. Due to material misrepresentations in the application for insurance, the insurer was entitled to treat its policy as having no legal effect from inception. Builders Capital (2014) Ltd. and 1053011 Alberta Ltd. (collectively, the “Claiming Mortgagees”) were mortgage lenders, and sought to make a claim under the Standard Mortgage Clause; however, the policy only listed the Royal Bank of Canada as mortgagee. Royal Bank was incorrectly listed as the mortgagee. In fact, Royal Bank was at no time a mortgagee.
The Claiming Mortgagees had been listed as mortgagees on the initial insurance policy issued by Security National Insurance. The Claiming Mortgagees had also been listed as mortgagees on the subsequent insurance policy issued by The Mutual Fire Insurance Company of British Columbia (“Mutual Fire”). However, unbeknownst to the Claiming Mortgagees, the Mutual Fire Insurance policy was cancelled and a new policy was obtained by the insureds from Aviva. In the Aviva Policy, the mortgagee was listed as the Royal Bank. It appears that Aviva had been advised by the insureds that the mortgagee was Royal Bank, as there may have been an intention to refinance with Royal Bank, though this never actually occurred.
In Builders Capital, the Claiming Mortgagees argued that since they were the actual mortgagees, the Standard Mortgage Clause in the Aviva Policy was a contract between the Claiming Mortgagees and Aviva. Further, the Claiming Mortgagees argument was essentially that since the only reason it was not listed on the policy was the “act, neglect, omission or misrepresentation attributable to the mortgagor”, the contract should be in force pursuant to the reasoning in Katsikonouris.
The Alberta Court of Appeal set out that it appeared the capitalization of the word Mortgagee, and the use of the word “the” before Mortgagee in the Standard Mortgage Clause, likely meant that it referred to a specific mortgagee listed in the Policy. However, the Court of Appeal acknowledged that the meaning was not clear because it was not defined, and the analysis in Katsikonouris does suggest that a mortgagee could include an entity who is not named in the policy by virtue of “act, neglect, omission or misrepresentation attributable to the mortgagor.”
Where there is an ambiguity, the principles of interpretation set out in Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33, apply. More particularly, the first steps are to determine if the ambiguity can be remedied based on the reasonable expectations of the parties and commercial realities. Only if ambiguity remains will the contra proferentem rule be employed to construe the policy against the insurer. In this case, the Alberta Court of Appeal was able to resolve the ambiguity through review of the reasonable expectations of the parties and commercial realities.
The Court of Appeal acknowledged that the Standard Mortgage Clause was considered a separate contract of insurance than the one with the named insured. Therefore, the Court reasoned that in order for an insurer to enter into a separate contract with a mortgagee, it had to know who the mortgagee was. Without the knowledge of who the mortgagee was, the Court of Appeal held that it made no commercial sense for an insurer to agree to enter into a contract of insurance. Further, the commercial reality of mortgage agreements is that the mortgagee is provided with evidence of the policy, to satisfy itself that it has been properly added, and therefore while the insured may organize the insurance, the mortgagee is still able to protect its own interests. That is, a failure to be named on the policy is not an “act, neglect, omission or misrepresentation attributable to the mortgagor” of which a mortgagee would be ignorant.
Further, the Court of Appeal held that some of the terms of the Standard Mortgage Clause do not make sense if the mortgagee was unknown. For example, how could an insurer advise a mortgagee that the policy was terminated or altered if the identity of the mortgagee is unknown. This is made all the clearer when you consider that some mortgagees are equitable and not registered on title. The Court of Appeal held that the interpretation that any mortgagee, whether or not listed on the policy, is a “mortgagee” under the Standard Mortgage Clause would lead to an unrealistic situation that the parties would not reasonably have contemplated, and that does not make commercial sense.
Therefore, the Court of Appeal dismissed the appeal and denied the Claiming Mortgagees coverage under the Aviva Policy. The Court of Appeal noted that the Claiming Mortgagees may not be without recourse as against Mutual Fire, though it was not before the Court, as the Claiming Mortgagees had not been advised of the cancellation of the Mutual Fire Policy.
The Alberta Court of Appeal has made it clear that the Standard Mortgage Clause does not apply to just any mortgagee, but instead only the mortgagee that is known to the insurer. This is usually the mortgagee listed on the policy. Therefore, if a claim is made by a party purporting to be the mortgagee, a review of the policy itself is required before making payment under the policy, even if that mortgagee is registered on title or is otherwise able to prove it is an actual mortgagee.
We note that while Builders Capital was mainly decided in the context of the actual mortgagee not being listed as a mortgagee, the key is the knowledge of the insurer of the identity of the mortgagee. While naming the mortgagee on the policy is evidence of an insurers knowledge of identity of the mortgagee, it may be possible that other evidence could be led to show such knowledge. That is, if failing to properly name the mortgagee on the policy was the fault of the insurer, who was aware of who the mortgagee was supposed to be, there may still be an argument that the proper mortgagee can claim under the Standard Mortgage Clause even if not listed on the policy.