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Insurer liable to pay mortgagee in possession for damage despite owner’s actions, Autumn 2006

A mortgagee recently won its appeal against an insurance company at the Manitoba Court of Appeal, successfully defending a lower court’s decision that the standard mortgage clause in the policy required that the insurer pay the mortgagee for damage caused by the mortgagor.

Assiniboine Credit Union Ltd. was the mortgagee of a residential property in Winnipeg beginning in 1999. Aviva Insurance Co. of Canada insured the property. At some point in the winter of 2001, without Assiniboine’s knowledge, Aviva received a request for a vacancy permit for the property, which permit was renewed a number of times, but neither the insurer nor the mortgagor notified Assiniboine that the premises were empty. Payments under the mortgage lapsed in the spring of 2002, and Assiniboine went into possession in August, only to find that the property had been damaged by water from burst pipes the previous winter. The damage to the property was about $26,000. Assiniboine claimed under the policy of insurance and Aviva denied coverage.

The lower court found Aviva liable to cover the damages because it should have notified the mortgagee that the premises were vacant to give it a chance to protect its security from damage. Aviva appealed, arguing that:

(1) the lower court had erred in finding it liable based on the absence of notice of the vacancy permit; and

(2) its policy specifically excluded “loss or damage caused by continuous or repeated seepage or leakage of water”, and that the exclusion was not superceded by the standard mortgage clause in the policy which holds the insurer liable to the mortgagee “notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor...”

The Manitoba Court of Appeal held in Assiniboine’s favour based on its reading of existing case law. The court held that since the closing words of standard mortgage clause stated that the clause would supercede any policy provisions in conflict with it, the intention was that specific exclusions would also be superceded.

The court agreed with the lower court judge’s assertion that any other interpretation “would stand to defeat the very purpose of relying on the Standard Mortgage Clause.” It also agreed with the lower court’s assessment of the merits of having the lender protections of the standard clause, noting that the clause saves time and paperwork – and by extension, money – over a system where lenders and insurers would have to contract for separate coverage against damage occasioned by borrowers who the mortgagee can’t control, and which would require mortgagees to ensure that premises are continually occupied and cared for.

Assiniboine Credit Union Ltd. v. Aviva Insurance Co. of Canada [2006] M.J. No. 176.