All fire insurance policies which cover a mortgaged immovable contain a clause dealing with the mortgage security (the "mortgage clause"). Financial institutions are familiar with this clause, which is considered as a separate contract from the insurance policy between the insurer and the mortgage creditor (the "creditor") of the insured immovable.1 Under this separate contract, the actions, negligence or statements of the insured—for example, misrepresentations by the insured when the policy is first taken out—cannot be invoked against the mortgage creditor. Moreover, this characteristic of the mortgage clause is also its cornerstone.

However, the protection afforded to the creditor by the mortgage clause does suffer from imperfections, which are underlined in the judgment rendered on January 25, 2011 by the Quebec Court of Appeal in the matter of Xceed Mortgage Corporation v. Wawanesa.2

In the aforementioned case, the creditor exercised his hypothecary rights against its debtor, who was insured by Wawanesa. Unfortunately, a fire substantially damaged the mortgaged building (the "building") before the creditor completed its recourse. The creditor therefore filed a claim with Wawanesa who refused to indemnify it, arguing that the creditor failed to inform the insurer that the insured no longer lived in the building and had rented it to a third party.

Indeed, in the certificate of service of the motion to institute proceedings for forced surrender which was served by the creditor, the bailiff mentioned that a third party, and not the insured, occupied the insured building.

The mortgage clause attached to the policy issued by Wawanesa contained the following provision:

[Translation] The mortgage creditors must promptly disclose to the insurer (if the insurer is known to them) any circumstances that increase the risks set out in the policy and that are a result of their actions if the said circumstances would materially affect the insurer in setting the rate of the premium, assessing the risk, or deciding to maintain the insurance [...]

Wawanesa's refusal to pay was based on the fact that since this was a homeowners' policy, Wawanesa would not have agreed to insure the building knowing that it was rented to a third party. According to the insurer, this fact would have had a material impact on its decision to maintain the insurance and ought to have been disclosed to it by the lender.

In its judgment, the Court concluded that the insurer never intended to insure for the risk of fire where the insured did not live in the building as a homeowner and that, if it had been informed of this on a timely basis, it would have terminated the policy before the loss occurred. The lender's action for payment of the insurance indemnity was therefore dismissed.

This Court decision without a doubt brings to light the significant impact that a material change in risk may have on a mortgage creditor.

Footnotes

1 National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 SCR 1029.

2 Xceed Mortgage Corporation et Xceed Funding Corp. v. Wawanesa compagnie mutuelle d'assurance, 2011 QCCA 197.

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