June 1, 2018

Ontario Court of Appeal: mortgagors have no interest in mortgagees’ insurance policies

The Ontario Court of Appeal has ruled that an insurance policy providing coverage solely to a mortgagee does not also protect a mortgagor's interest in a property.

In Hanson v. Totten Insurance Group Inc., the mortgagees of an Ontario property obtained a policy of insurance because the mortgagors had been unable to obtain their own.  The policy named the mortgagees as the insured and the mortgagors reimbursed them for paid premiums. The policy contained an unambiguous “no-co-insurance endorsement”, which clearly stated that the policy would protect only the interest of the named insured and no other party.  However, the mortgage also provided a Standard Charge Term that read:

The [mortgagor] will immediately insure…the buildings on the land to the amount of not less than their full insurable value…; otherwise the [mortgagee] may provide therefor and charge the premium paid and interest thereon…to the [mortgagor].

Following a loss to the property, the insurer paid the mortgagees for their loss and moved to begin a subrogated claim against the mortgagors using power of sale proceedings. The mortgagors brought a motion to determine whether the policy also covered their interest in the property such that the payment on the policy extinguished their mortgage debt.

The obligation to insure fell to the mortgagor 

The motions judge concluded that the obligation to insure fell to the mortgagor but also ruled that where they failed to obtain insurance, the mortgagee was entitled to obtain it for their benefit alone.

The mortgagors appealed the decision arguing that the language in the Standard Charge Term should be interpreted to mean that the mortgagee is required to obtain the same coverage that the mortgagor was required to obtain — ie. a policy covering the mortgagor's interest. The Court of Appeal rejected this argument on the basis that the mortgagor was converting a permissive clause ("…may therefor provide") into a mandatory obligation.

The mortgagor also argued that it was entitled to the benefit of coverage having paid the premiums. The court rejected this argument ruling that the policy provided that it was to bear the cost of insurance. This included the cost of any insurance policy obtained by the mortgagee. Reading the Standard Charge Term as a whole, the court found no doubt that it was for the benefit of the mortgagee alone.

As the mortgagor had no interest in the insurance policy, the mortgagee and the insurer were allowed to proceed with the subrogated claim.