Insurance Protection For Secured Lenders

• Published date: 20 October 2022
• Subject Matter: Finance and Banking, Insurance, Charges, Mortgages, Indemnities, Financial Services, Insurance Laws and Products
• Law Firm: Miller Thomson LLP
• Author: Ms Jenna Zaleski, David Reynolds and 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...