Denial of Insurance Coverage: Risky Business

In 2005, the SCC released Royal Bank of Canada v. State Farm Fire and Casualty Company, an appeal from the Court of Appeal for Ontario which addresses the issue of whether an insurer, on the basis of a statutory condition, is able to deny a claim and void coverage granted to a mortgagee for damage resulting from a house fire on the basis that the appellants failed to notify the insurer that the house was unoccupied, i.e. a “change material to the risk” which was within the control and knowledge of that mortgagee.

In 1997, a couple, the Deeks, purchased a house near London, Ontario and insured it against fire through State Farm Fire and Casualty Company. By 2000, the Deeks vacated their house after defaulting on their mortgages with the appellant-mortgagees, Royal Bank of Canada and Michael Alexander, who had commenced power of sale proceedings. While the house remained vacant at all times, the appellants exercised some control over the property by securing and maintaining it. The insurer was not notified by the Deeks or the appellants of the vacancy of the house.

The insurance policy included a clause for the benefit of mortgagees, referred to as the “Mortgage Clause”. This clause explains that terms of the policy which conflict with this clause, including exceptions to the mortgagor’s coverage, do not affect the mortgagees’ coverage. It also states that coverage shall continue “notwithstanding…any vacancy or non-occupancy” that can be attributed to the mortgagor. Pursuant to this provision, the appellants filed claims with the insurer with respect to the damage caused by the fire. The insurer, however, denied the claims on the basis that they were not informed of the vacancy. They claimed that this was a “change material to the risk” within the control and knowledge of the appellants, and thus could deny payment pursuant to another clause in the agreement, Statutory Condition Number 4. According to this provision, “any change material to the risk and within the control and knowledge of the Insured voids the contract as to the part affected thereby, unless the change is promptly notified in writing to the Insurer or its local agent…”.

After being denied payment for the loss, the appellants sued the Insurer, alleging breach of the policy. At the Ontario Superior Court of Justice in 2002, Wilton-Siegel J. found in favour of the appellants. In coming to this conclusion, the judge found that Statutory Condition Number 4 and the Mortgage Clause were not in conflict with each other and that Statutory Condition Number 4 was not applicable in the particular circumstances, as the appellants did not have control over the change (the Deeks’ vacancy of the house) since neither of the appellants had title. In 2004, the Court of Appeal for Ontario allowed the appeal and granted judgment in favour of the insurer. While the appellate court agreed with Wilton-Siegel J. that Statutory Condition Number 4 was not in conflict with the Mortgage Clause, they found that after the vacancy continued once the appellants gained control of the house, a “change material to the risk” did occur which was within the appellants’ control and knowledge, allowing the insurer to void the policy.

At the SCC, the appeal was allowed and the Mortgage Clause and Statutory Condition Number 4 were found to be in conflict with one another. Statutory Condition Number 4 allows the insurer to void coverage on the basis of a “change material to the risk and within the control and knowledge of the insured”. Assuming that the word “Insured” in this condition refers to the mortgagor, or the mortgagor and mortgagees, this clause is inconsistent with the first paragraph of the Mortgage Clause, which allows for the mortgagees’ coverage to continue, despite any acts committed by the mortgagor, including one which may cause a “change material to the risk”. Further, another conflict exists between the two clauses. In the Mortgage Clause, the insurer promises continued coverage despite vacancy. As a result of the existing conflict between the two clauses, the insurer cannot rely on Statutory Condition Number 4 to deny the appellants’ claims and nullify their coverage, as the Mortgage Clause, according to its final paragraph, supersedes the former clause.

As stated for the SCC by Justice Major in paragraph 30,

If the Insurer wished to be able to void a mortgagee’s coverage in the event of a “change material to the risk” within that mortgagee’s control and knowledge of which it was not notified, it should have used clear language to that effect. It cannot expect this Court to contort the Mortgage Clause and Statutory Condition Number 4 in order to fulfill its unreflected, but professedly true, intention”.

In this case, a mortgagee who is aware, but fails to report a vacancy of the property to the insurer, can still enforce coverage for loss caused by fire according to the Standard Mortgage Clause. As the SCC stated above, insurers must clearly amend the wording of the Standard Mortgage Clause in order to nullify coverage in the event of a “change material to the risk” which is within the control and knowledge of the mortgagee, but left uncommunicated to the insurer.