Standard mortgage clause does not protect undisclosed, 'actual' mortgagee : Alberta Court of Appeal

Applying the general rules of contract construction, the Court of Appeal of Alberta ruled that the “mortgagee” referred to in an insurance policy’s standard mortgage clause did not protect the undisclosed, “actual” mortgagee in Builders Capital (2014) Ltd v Aviva Insurance Company of Canada, 2022 ABCA 120.

In 2014, two individuals obtained a loan from appellants Builders Capital (2014) Inc. and 1053011 Alberta Ltd for the construction of a residential property under a mortgage agreement.

The same individuals were later issued a homeowner’s insurance policy by the respondent. The policy covered the property for damage caused by fire and contained a standard mortgage clause approved by the Insurance Bureau of Canada which exempted mortgagees from the consequences of “any act, neglect, omission or misrepresentation” attributable to the insured.

The policy did not mention appellants, instead identifying the Royal Bank of Canada as mortgagee. This information, while incorrect, had been provided by the insured to the respondent before the policy had been issued. When a broker for the insured later inquired about adding one of the appellants as a second mortgagee, the respondent declined the request, explaining that Builders Capital was a mortgage company it did not write with.

The property was later substantially damaged by fire. After investigation, the respondent treated the policy as void ab initio and of no force and effect considering several misrepresentations of material fact had been made during the application for insurance.

Appellants filed a claim against the respondent alleging that the standard mortgage clause in the policy gave them, as mortgagees, a right of action against respondent “free from any misrepresentations that may have been made by the Insureds”.

The trial judge held that the appellants were not entitled to coverage under the policy. While accepting that the standard mortgage clause, once engaged, protects the lender, she ruled it was necessary for the insurer to first agree to extend protection to that particular lender.

The appellants brought the case before the Court of Appeal of Alberta. Relying on the Supreme Court of Canada’s analysis in National Bank of Greece (Canada) v Katsikonouris, they argued that the mortgagee referred to must include them as the actual mortgagees.

The appellate court dismissed the appeal. Katsikonouris was not determinative to the issue in this case, which was who the mortgagee protected by the standard mortgage clause in the Aviva policy was.

The court found that the term “mortgagee” as used in the policy was ambiguous, but that under the facts of the case, the respondent did not in any way expect – or represent to appellants that it intended – to enter a separate and distinct contract with them.

The appellate court also rejected the argument that a narrow interpretation of the term “mortgagee” would defeat the purpose of the standard mortgage clause to protect the mortgagees who had “reasonably expected to be protected” by the respondent under the policy. The Court of Appeals of Alberta pointed out that this argument went against the ordinary commercial context in which insurance policies were obtained, requiring the policy to be read “as revealing a contract between parties who reasonably expected to be unknown to one another.”

The Court of Appeal affirmed the trial judge’s conclusion and dismissed the appeal.