In Farmers' Mutual Insurance Company (Lindsay) v. Pinder, the Ontario Court of Appeal confirmed that there are two preconditions to an insurer’s right to subrogation under standard mortgage clauses. First, the insurer must make payment of the loss award, or part of it, to the mortgagee. Second, the insurer must establish a claim that it has no liability to the mortgagor insured.


The Pinders held an insurance policy on their home with Farmers’ Mutual Insurance Company (“Farmers’ Mutual”). The home was subject to a five-year mortgage with the Bank of Montreal. After a fire damaged the Pinders’ home, they submitted a claim to Farmers’ Mutual for damage and repairs to the home, and additional living expenses. Farmers’ Mutual denied the claim on the grounds that the Pinders failed to notify the insurer of a material change in the risk, thereby voiding the policy, and that the Pinders made willfully false statements with respect to their claims, vitiating their right to recover.

Under the Standard Mortgage Clause of the insurance policy, the Bank of Montreal submitted a proof of loss seeking payment of the balance of the mortgage loan outstanding. Farmers’ Mutual paid the Bank the principal balance of the mortgage.

The Pinders initiated an action against Farmers’ Mutual seeking a declaration that the insurance policy was valid and binding, and Farmers’ Mutual commenced an action seeking recovery of the amount paid to the bank, relying on its right of subrogation under the Standard Mortgage Clause.

Farmers’ Mutual brought a motion for summary judgment in its action against the Pinders. In response, the Pinders brought a motion for the consolidation of the two actions. The motion judge granted summary judgment against the Pinders and stayed the Pinders’ claim.

The Pinders appealed the decision, seeking an order dismissing Farmers’ Mutual’s motion for summary judgment and an order directing that the two actions be tried together.

The Appeal

The issue on appeal was whether the sole precondition for the insurer’s claim to a subrogation right under the Standard Mortgage Clause was the insurer paying the mortgagee any part of the loss award under the insurance policy. The Court of Appeal rejected the cases relied upon by the motion judge and completed a general survey of the function and effect of the Standard Mortgage Clause within the policy.

The court recognized that the Standard Mortgage Clause has been a standard part of insurance policies for well over a century, and cited the unanimous decision of the Supreme Court of Canada in Caisse populaire des deux rives v. Société mutuelle d’assurance contre l’incendie de la vallée du richelieu.

In that case, Justice L’Heureux-Dubé found that though part of the policy between the insurer and insured, the Standard Mortgage Clause constitutes a second and separate insurance contract between the insured and the mortgagee. This two contract theory is firmly embedded in North American insurance practice and protects the mortgagee’s interest in the insured property even when the insured has done something to void the policy.

After reviewing the preconditions to the right of subrogation, the purpose of the Standard Mortgage Clause, and the commercial atmosphere in which insurance is contracted, the court held that the second precondition in the Clause should be interpreted to require that the insurer establish a claim that the insured mortgagor has voided the policy. This conclusion avoids a construction that would render the insurance coverage the insured mortgagor has purchased to cover the mortgage debt ineffective.

The Ontario Court of Appeal recognized that this approach to the language of the Standard Mortgage Clause has been applied throughout the North American insurance industry for decades. A review of Canadian and American jurisprudence and commentary reinforced the conclusion that there are two preconditions to the insurer’s entitlement to subrogation under the Standard Mortgage Clause.

The judgment granted by the motion judge was set aside and replaced with an order dismissing Farmers’ Mutual’s application for summary judgment and granting the Pinders’ motion that Farmers’ Mutual’s action be consolidated or heard together with their action. The Supreme Court of Canada refused to grant leave to appeal.