Legal Blog

Fire Gone

In our April 2004 newsletter, we wrote about the Ontario Court of Appeal decision in Royal Bank of Canada v. State Farm Fire and Casualty Company. The Supreme Curt of Canada, which does not often grant leave to appeal a commercial decision, much less reverse the Ontario Court of Appeal, dealt with the appeal in a 2005 decision.

Quick Summary 

Mortgagors insured a property with a homeowners’ policy through State Farm. The interest of the first mortgagee was noted on the policy. The mortgagors then defaulted on their mortgage to the Bank and the Bank initiated foreclosure proceedings, including taking possession of the property.

During the enforcement proceedings, a fire destroyed the property. State Farm refused to pay the Bank the insurance proceeds because the Bank had not notified it that the property was vacant, contrary, it alleged, to the insurance policy.

The insurance contract had three important clauses:

1.   The vacancy exclusion. This clause excluded State Farm’s liability to pay if the property was vacant for more than 30 days.

2.   Statutory Condition No 4 (“Stat 4”), which under the Insurance Act is deemed part of every fire insurance contract. It states, “any change material to the risk and within the control and knowledge of the insured voids the contract … unless the change is properly notified in writing to the insurer.” Once notified, the insurer may then cancel the policy or increase the premium.

3.   The mortgage clause, which insulates the mortgagee from improper actions of the mortgagor. It states that the mortgagee is covered regardless of any act or neglect of the insured that would otherwise void coverage, including any vacancy of the premises. However, it also stated that “The mortgagee shall notify forthwith the insurer (if known) … of any vacancy … extending beyond 30 consecutive days … that shall come to his knowledge.” Unlike Stat 4, there is nothing in the mortgage clause giving the insurer a right to cancel the policy for failure to give that notice.

The Court of Appeal held that “the mortgage clause is concerned with the conduct of the mortgagor and the mortgagee’s obligations if and when that conduct comes to the attention of the mortgagee. Statutory Condition No. 4 is concerned with the conduct of insured, including insured who are mortgagees. It addresses the consequences of the mortgagee’s actions which materially affect the insured risk.” Accordingly, the Court of Appeal determined that the two clauses were consistent with each other. It then went on to determine that the mortgagee ought to have given notice after it took possession of the premises and held that failure to do so resulted in a denial of coverage.

Inconsistent 

The Supreme Court of Canada disagreed that Stat 4 and the mortgage clause were consistent. As far as it was concerned, Stat 4 allowed the insurer to deny coverage if there was a vacancy greater than 30 days, but the mortgage clause applied regardless of the vacancy and lack of notice. Accordingly, Stat 4 did not apply. 

As to the proviso that a mortgagee had to notify the insurer (if known) of a 30-day vacancy, the court held that the mortgage clause did not go far enough. If the insurer expected to be able to void the contract for breach of the notice provision in the mortgage clause, it should have said so.

The court allowed the appeal; State Farm had to pay the Bank for the fire loss; and mortgagees can breathe easier.