The Alberta Court of Appeal denied an appeal from a mortgagee that it could recover under the standard mortgage clause despite not being named as the mortgagee on the underlying insurance policy.

Insurance law – Homeowner’s insurance – Material misrepresentations – void Ab Initio – Mortgages – Standard mortgage clause – Practice – Appeals

Builders Capital (2014) Ltd. v. Aviva Insurance Co. of Canada, [2022] A.J. No. 437, 2022 ABCA 120, Alberta Court of Appeal, April 1, 2022, B.L. Veldhuis, E.A. Hughes and A. Kirker JJ.A.

Thttps://canlii.ca/t/jr96qhe appellants were mortgage lenders (the “mortgagees”). The residential property against which their mortgage was secured was damaged by fire. At the time of the loss the property was insured by Aviva Insurance Co. of Canada (“Aviva”). The mortgagees thought the property was insured by a different insurer, having never been told by the mortgagor that it had cancelled the original policy and purchased a new policy from Aviva. Prior to securing the Aviva policy, the homeowner had provided Aviva with a Certificate of Property Insurance identifying the 1st Mortgagee as Royal Bank of Canada. This information was incorrect. Although the homeowner had advised the mortgagees of an intention to refinance the property with the Royal Bank of Canada, that had not occurred. The insurer voided the policy ab initio as a result of material misrepresentations in the application for insurance. The mortgagees sought to recover their losses under the terms of the standard mortgage clause which preserved coverage for “the Mortgagee” notwithstanding “any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property of the insured.” Aviva denied the mortgagees’ claim on the basis that they were not parties to the policy.

The mortgagees sued Aviva alleging that Aviva was contractually bound to pay the mortgagees’ claim by virtue of the language in the standard mortgage clause. The trial judge, however, agreed with Aviva and found that there was no insurance contract between Aviva and the mortgagees. The mortgagees appealed. The appeal hinged on the interpretation of the words “the Mortgagee” in the standard mortgage clause.

The mortgagees argued that the trial judge erred by interpreting the words “the Mortgagee” too narrowly, and that the words “the Mortgagee” must include them as the actual mortgagees. The Alberta Court of Appeal, guided by the general principles of interpretation with respect to insurance policies, examined the meaning of “the Mortgagee” and found that it was ambiguous because the policy did not define “Mortgagee” the way it defined “Insured” as “the person(s) named as Insured on the Certificate of Property insurance”, and further that, the qualifying language of the standard mortgage clause suggests that “the Mortgagee” could include a mortgagee who is not named in the policy by virtue of an “act, neglect, omission or misrepresentation attributable to the mortgagor.”

To resolve the ambiguity, the Court examined the reasonable expectation of the parties as gleaned from the purpose of the standard mortgage clause and the ordinary commercial circumstances surrounding its use and held that “to accept the appellant’s interpretation of “the Mortgagee” … “requires that we read the … Policy as revealing a contract between parties who reasonably expected to be unknown to one another” and that “this was not a conclusion that could be drawn from the purpose of the standard mortgage clause…or from the commercial circumstances surrounding its use.”

The Court further held that the appellants’ interpretation of the standard mortgage clause would have rendered several of its terms unworkable and that, in resolving the ambiguity in the meaning of “the Mortgagee” the Court must avoid an interpretation that would bring about unrealistic results or results that the parties would not have contemplated in the commercial atmosphere in which they sold or purchased the policy. The Court held that “the Mortgagee” cannot mean the appellants as that interpretation leads to an unrealistic interpretation the parties would not reasonably have contemplated and “…does not make commercial sense.” The Court concluded that the trial judge was correct in concluding that the appellants were not entitled to coverage under the policy.

This case was first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter.