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.
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
1 National Bank of Greece (Canada) v.
Katsikonouris,  2 SCR 1029.
2 Xceed Mortgage Corporation et Xceed Funding Corp.
v. Wawanesa compagnie mutuelle d'assurance, 2011 QCCA
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The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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