Last Week’s Court Rulings from the Alberta Court of Queen’s Bench, Court of Appeal and SCC.
Edited by Steven Graham
Builders Capital (2014) Ltd. V Aviva Insurance Company of Canada, 2022 ABCA 120
Standard Mortgage Clause | Misrepresentation | Denial
The appellants appeal from a trial decision dismissing their claim against Aviva Insurance Company. The underlying matter concerns a residential property which was insured by Aviva. The appellants are mortgage lenders who held a mortgage secured against the property in question. When the property was damaged by fire and misrepresentations were discovered in the insurance application which voided the policy, the appellants sought to recover their losses under the terms of the standard mortgage clause. Aviva denied the appellants’ claim on the basis that they were not mortgagees listed on the policy. The trial judge agreed, finding no insurance contract between the appellants and Aviva.
The Court provided an excerpt from the Aviva policy, and noted that the specific language did not refer to the appellants as a mortgagee at all. Instead, the “1st Mortgagee” as defined in the policy was the Royal Bank of Canada, which was the information provided to Aviva prior to the policy coming into effect. As the Court noted, this was an error – the mortgagors advised the appellants of an intention to refinance the property through the Royal Bank of Canada, but this never occurred. This information however was provided to Aviva and formed the basis of the new insurance policy.
There was a request made by a broker on behalf of the property owners that the appellants be added to the Aviva Policy as a second mortgage holder after the Royal Bank of Canada, and this was refused by Aviva. Following this exchange the policy was not cancelled by the property owners.
After the property was damaged by fire, Aviva investigated and concluded that misrepresentations of material facts were made in the insurance application, and so the Aviva policy was considered void ab initio.
At trial, the Court had to consider whether Aviva was contractually bound to pay the appellants’ claim as a result of wording in the standard mortgage clause which exempts mortgagees from the consequences of ‘any act, neglect, omission or misrepresentation’ attributable to the insureds. The trial judge concluded that Aviva never agreed to extend coverage to the appellants, and the evidence from Aviva was such that it would not have extended the policy if it knew that the appellants were the mortgage lender. The evidence demonstrated that to Aviva’s knowledge, RBC was the only lender on the property. Ultimately the trial judge concluded no contract between the appellants and Aviva could be implied.
The appellants argued that the trial judge erred in interpreting the standard mortgage clause and that they should have been covered as the actual mortgagees.
The Court of Appeal noted that the critical issue in this case was who the mortgagee is in the Aviva policy that has the protection of the standard mortgage clause. The Court of Appeal found that the meaning of ‘mortgagee’ in the policy was ambiguous:
[31] When the words “the Mortgagee” are read together with the words in the Certificate of Property Insurance describing the Royal Bank of Canada as the “1st Mortgagee”, they strongly suggest that the specific mortgagee covered by the Standard Mortgage Clause is the Royal Bank of Canada, not the appellants.
[32] However, we are not satisfied this meaning is clear.
[33] First, the Aviva Policy does not define “Mortgagee” the way it defines “Insured” as “the person(s) named as Insured on the Certificate of Property Insurance …”. This inconsistency in the Aviva Policy language raises a question about whether “the Mortgagee” could be interpreted as a mortgagee other than the “1st Mortgagee” identified in the Certificate of Property Insurance.
[34] Second, the qualifying language of the Standard Mortgage Clause – broadly interpreted by the Supreme Court of Canada in Katsikonouris at 1045-1046 and relied upon by the appellants – does suggest that “the Mortgagee” could include a mortgagee who is not named in the policy by virtue of an “act, neglect, omission or misrepresentation attributable to the mortgagor.”
The Court of Appeal considered the reasonable expectations of the parties in their attempt to resolve the ambiguity, turning to the purpose of the standard mortgage clause and the ordinary commercial circumstances surrounding its use, as well as the language of the policy as a whole:
[37] Put simply, the Standard Mortgage Clause aims to relieve mortgagees of the responsibility for, and the consequences of, “any act, neglect, omission or misrepresentation” of the mortgagor that is, by the commercial necessity described in Katsikonouris, beyond the reach of the mortgagee’s knowledge.
…
[38] It is clear the respondent entered the Aviva Policy on the mistaken belief that it was dealing with the Royal Bank of Canada. The respondent was never advised that the appellants were mortgagees of the Property and expressly declined to continue coverage under the Aviva Policy when an inquiry was made about adding Builders Capital as a second mortgagee. As a consequence, and unlike the insurers in Katsikonouris and the other cases upon which the appellants rely[1], the respondent did not in any way expect, or represent to the appellants that it intended, to enter a separate and distinct contract with them.
The appellants argued that the purpose of the standard mortgage clause is undermined if they, as the actual mortgagees, are not protected. They argued that they reasonably expected to be protected by Aviva under the policy. After examining the specific wording of the mortgage agreement between the appellants and the property owners, the Court of Appeal determined that this argument did not meet commercial reality or reflect how the appellants had acted with respect to insurance policies issued prior to the Aviva policy:
[41] The Mortgage Agreement shows that the appellants expected to receive “a policy or policies and receipts … evidencing” insurance on the Property “[p]rior to the making of any advance” of the mortgage loan. The appellants also expected to receive “evidence of renewal or replacement” of the insurance covering the Property “at least fifteen (15) days prior to the expiry of a policy or at least five (5) days prior to the date fixed for cancellation of a policy should notice of cancellation be given.” The Mortgage Agreement additionally provided that “[e]very policy of insurance shall be effected in such terms and with such insurer as may be approve[d] by the Mortgagee” and allowed the appellants to “effect such new insurance as the Mortgagee may desire” if, at any time, the appellants ceased to approve of the insurance.
[42] These terms are not unusual. They are illustrative of the ordinary commercial context in which each of the policies of insurance covering the Property was obtained and explain how the appellants remained in a position to ensure their own interests in the Property were protected.
The Court of Appeal determined that the appellants did not relinquish responsibility and control of their risk to the insureds; indeed, they waited to receive the mortgage copy of prior insurance policies before making advances, which demonstrated that they reasonably expected to know about any errors made in identifying them as mortgagees in insurance policies. As such, the failure of the insureds to identify the appellants as mortgagees in the Aviva policy was not an ‘act, neglect, omission or misrepresentation attributable to the mortgagor’ of which the appellants were ignorant:
[44] To accept the appellant’s interpretation of “the Mortgagee” in the Standard Mortgage Clause requires that we read the Aviva Policy as revealing a contract between parties who reasonably expected to be unknown to one another. This is not a conclusion that can be drawn from the purpose of the Standard Mortgage Clause as described in Katsikonouris or from the commercial circumstances surrounding its use in this case.
[45] Further, the appellants’ interpretation of the Standard Mortgage Clause renders several of its terms unworkable.
The Court of Appeal looked to the wording of the standard mortgage clause to resolve the ambiguity in the meaning of mortgagee in the Aviva policy, in order to avoid an interpretation that would “bring about unrealistic results…in the commercial context”, in keeping with the Supreme Court of Canada’s direction from the Consolidated-Bathurst Export Ltd. line of authority:
[47] Section 5 of the Standard Mortgage Clause provides that the insurer “…will neither terminate nor alter the policy to the prejudice of the Mortgagee without the notice stipulated…” in the statutory provision governing termination. Under s. 540 of the Insurance Act, RSA 2000, c I-3, statutory condition 5 governs the termination of insurance. It provides that the insurer may terminate the insurance contract by giving the insured 15 days’ notice of termination by recorded mail or 5 days’ written notice of termination delivered personally.
[48] This notice requirement has been interpreted to mean that coverage for “the Mortgagee” remains in place until “the Mortgagee” has received notice of termination directly…
[49] This reasoning is consistent with the theory that the Standard Mortgage Clause reflects a separate and distinct contract between the insurer and the mortgagee, and with s. 539 of Alberta’s Insurance Act which provides:
539(1) When a loss under a contract has, with the consent of the insurer, been made payable to a person other than the insured, the insurer shall not cancel or alter the contract to the prejudice of that person without notice to that person.
(2) The length of notice and method of giving the notice under subsection (1) must be the same as the length and method of giving notice of cancellation to the insured under the statutory conditions in the contract.
The Court of Appeal queried how an insurer can send notice if the mortgagee means any mortgagee with an interest in the property, whether identified in the policy or not, particularly since equitable mortgage interests could exist but not be registered on title. The Court of Appeal concluded that an insurer could not reasonably meet its obligations under the standard mortgage clause if the mortgagee was defined as the appellants contend:
[52] When these provisions of the Standard Mortgage Clause are considered, it is apparent that “the Mortgagee” in the Aviva Policy cannot mean the appellants as they claim because this interpretation leads to an unrealistic situation the parties would not reasonably have contemplated. It does not make commercial sense.
The Court of Appeal further noted that no authority for the appellants’ position was provided:
[55] In this case, while the appellants claim they had a contract with the respondent and that they relied upon the Aviva Policy, the fact is they did not. The appellants had not received notice of termination of the coverage available to Builders Capital under the Mutual Fire Insurance Policy. From their perspective, the separate and distinct contract formed between them and the Mutual Fire Insurance Company of British Columbia by way of the Standard Mortgage Clause in that policy remained in place. For reasons unknown to us, no claim against the Mutual Fire Insurance Policy was made. However, it appears Builders Capital was not without a remedy.
Ultimately the Court of Appeal found no error in the trial judge’s decision, and dismissed the appeal.