A Standard Mortgage Clause is a common element of insurance
policies in respect of mortgaged real property. Lenders will
typically require the inclusion of such a clause in a
borrower's insurance policy as a condition precedent to
providing a loan. While the coverage afforded to the insured
mortgagor under such a policy relates to the property itself, the
Standard Mortgage Clause operates to protect the mortgagee's
security interest in the property. This "two contract"
theory was recently reconfirmed by the Ontario Superior Court of
Justice in Portage.1 The Standard Mortgage
Clause was found to permit a mortgagee to make an insurance claim
for the balance owing on its mortgage after the sale of a
fire-damaged property, without any obligation to repair that
property in advance of the sale.
In Portage, the borrower/mortgagor, Mr. Bell, had
insured his residential property with the defendant insurance
company, Portage La Prairie Mutual Insurance Co. (PLP). The
insurance policy contained a Standard Mortgage Clause in favour of
the mortgagee on the property, Equitable Trust Co. (Equitable).
During the term of the insurance policy, the property was damaged
by fire that PLP alleged was started by Mr. Bell. Shortly
thereafter, Mr. Bell defaulted under the mortgage and Equitable
proceeded to sell the property on an "as is" basis since
neither Mr. Bell nor Equitable wanted to repair the damage prior to
sale. After applying the sale proceeds to the mortgage loan, the
shortfall amount required to fully discharge Equitable's
mortgage was over $98,000, which Equitable claimed from PLP under
the insurance policy.
PLP denied Equitable's claim for the shortfall, arguing that
Equitable was obligated to take steps to repair the property before
selling it. PLP contended that Equitable was only entitled to the
"Actual Cash Value" of the cost to repair the damage.
Since Equitable had sold the property for more than the Actual Cash
Value of the damage, PLP took the position that Equitable was not
entitled to any recovery.2 PLP also raised a number of
arguments against Mr. Bell, including allegations of arson and
misrepresentation, in an attempt to deny any recovery under the
In deciding the matter, the Court referred to an American
article3 which summarized the "two
contract" theory of Standard Mortgage Clauses that has been
accepted in Canadian jurisprudence.4 The Court cited
with approval the following key elements from that article:
A Standard Mortgage Clause allows a mortgagee to recover under
a policy regardless of the actions of the mortgagor;
A mortgagee's right to recover is limited by the amount of
the remaining debt secured;
A mortgagee's interest in the policy is in respect of its
security interest in the property, not the property itself;
A Standard Mortgage Clause creates a separate contract of
insurance between the insurer and the mortgagee and thus the
acquisition of the property by the mortgagee actually increases the
In accordance with the "two contract" interpretation,
the Court held that any arguments PLP may have had against the
insured could not be used against Equitable. Given that the
Standard Mortgage Clause created a separate insurance contract
between Equitable and PLP, Equitable's insured interest was, in
fact, the amount of the shortfall it realized following the sale of
the property. Equitable was awarded the amount of its shortfall as
Equitable was not obligated, contractually or otherwise, to make
any repairs before selling the property.
This decision serves as a reminder to lenders of the importance
of including a Standard Mortgage Clause in insurance policies over
mortgaged real property in order to obtain the primary benefits of
a separate contract of insurance between the insurer and the
mortgagee. It also provides a useful summary of the nature of the
relationship between a mortgagee and an insurer created by a
Standard Mortgage Clause.
1 Equitable Trust Co v. Portage La
Prairie Mutual Insurance Co, 2014 ONSC 4767
2 Portage, at para.
16. The judgment does not state what contractual support or case
law was provided by PLP in support of its position.
3 Portage, at paras.
22-24. No citation for this article was provided in the reported
4 National Bank of Greece (Canada) c.
Katsikonouris,  2 SCR 1029 (SCC).
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