Insurance protection for secured lenders

October 19, 2022 | Jenna Zaleski, David Reynolds, Kenneth R. Rosenstein

Insurance certificates often provide that a debtor’s secured lenders are an “additional insured” and/or a “loss payee” on the debtor’s insurance policies without the statement that the lender is a “mortgagee” with a “standard mortgage clause.”  These key words need to be included in order to protect the lender from loss or damage suffered to the debtor’s collateral securing their loan regardless of the debtor’s actions or inactions.

The Alberta Court of Appeal has recently re-highlighted the importance of the lender being expressly named as a mortgagee on the insurance policy to be afforded the protections of the standard mortgage clause.  Having the lender named on the insured’s policy of insurance has been common practice for decades with the Supreme Court of Canada in Caisse Populaire Des Deux Rives v. Société Mutuelle d’Assurance Contre L’Incendie de la Valléé du Richelieu, [1990] 2 S.C.R. 995 ruling that doing so creates a distinct standalone contract between the insurer and the lender/mortgagee, in addition to the direct contract already existing between the insured and insurer under the policy. The addition of the standard mortgage clause ensures the separate contract between the insurer and the lender/mortgagee remains valid regardless of whether the insured causes, takes, or makes any action, omission or misrepresentation that could void the insurance policy between the insurer and insured.

In the recent decision of Builders Capital (2014) Ltd v Aviva Insurance Company of Canada, 2022 ABCA 120, the appellant lenders loaned funds to two debtors/insureds to construct a residential property. Though the debtors/insureds had later been issued a homeowner’s insurance policy by the respondent insurer, the policy, which covered for property damage and was subject to a standard mortgage clause, did not name the appellant lenders as additional insured, loss payee or mortgagee (rather the Royal Bank of Canada was listed as a mortgagee). Though inaccurate, the respondent insurer had been provided with this information from the insured before the policy was issued, and when an inquiry was later made to add one of the appellant lenders to the policy as second mortgagee, the respondent insurer was not agreeable to such addition since it did not underwrite insurance policies with that specific mortgage company.

After a fire caused damage to the insured real property, the respondent insurer deemed the policy of no force and effect due to the misrepresentations in the insured’s insurance application; the appellant lenders claimed the standard mortgage clause in the policy afforded them protection. At trial and subsequently upheld by the appellate court, it was ruled that the standard mortgage clause and therefore the coverage under the policy did not extend to the appellant lenders, notwithstanding their argument that they were ‘actual’ mortgagees. To rely on the protections extended by the standard mortgage clause, basic contract principles still applied in that the insurer must still agree to the separate contract between the insurer and lender/mortgagee. It was not enough that the lender/mortgagee reasonably expected to be protected, as the court made a factual determination that the respondent insurer in this case did not represent or intend to afford coverage to the appellant lenders.

As demonstrated by this decision, it is critical for a secured lender to be expressly identified and named as a “loss payee” and “mortgagee subject to a standard mortgage clause” on all-risks real property insurance policies to ensure that a lender’s interests are properly protected in these situations. A standard mortgage clause is generally given only in respect of real property.  Although we are not aware of a case confirming enforcement of the clause in respect of personal property, a secured lender should also require that the standard mortgage clause expressly applies to personal property and/or receive a lender’s loss payable endorsement in order to get similar protection in respect of personal property.

If you have any questions, please reach out to a member of Miller Thomson’s Financial Services or Restructuring & Insolvency groups.

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