The vacancy of a residence constitutes a material change in risk in a policy of home insurance, and the insurance policy is voided by the failure of the insured to notify of the change in risk upon vacating the premises. The policy is void whether the policy is payable in favour of the insured, or a third party, such as a bank with a mortgage in trust in the property.

15. January 2004 0

Royal Bank of Canada v. State Farm Fire and Casualty Co., [2004] O.J. No. 91, Ontario Court of Appeal

A fire destroyed a home that the Royal Bank of Canada and Mr. Alexander held mortgaged interests in (“the Mortgagees”). The property was insured by the owner/mortgagor under a fire insurance policy issued by State Farm Fire and Casualty Co. (“State Farm”). The house had been vacated prior to the fire, but the Mortgagees had not obtained legal title through foreclosure. State Farm took the position that the vacancy constituted an undisclosed material change in risk and voided the insurance policy against both the mortgagor and the Mortgagees. Actions were commenced by the Mortgagees for payment pursuant to the policy of insurance. Wilton-Siegel, J., determined that resolution of the matter required the interpretation of three provisions in the policy of insurance: the mortgage clause, the vacancy exclusion, and Statutory Condition Number 4; which refers to material change to the insured risk and entitles the insurer to void or cancel the policy. The court relied on Royal Bank of Canada v. Red River Valley Mutual Insurance Co. (1986), 42 Man. R. (2d) 124 for the proposition that the terms and conditions of an insurance policy only apply to a mortgagee when they are consistent with the terms contained in the mortgage clause. Since the mortgage clause clearly stated that an insurer cannot rely upon the conduct of a mortgagor to void the policy against the mortgagee, the fact that the policy contained a vacancy clause could not be relied upon as the basis for voiding coverage to the Mortgagees. Statutory Condition Number 4 requires that an insured, which includes a mortgagee, notify the insurer of any material change in risk which is within the control and knowledge of the insured. Wilton-Siegel J. determined that the vacancy of the property would only be within the knowledge and control of the Mortgagees if they were in a position to restore the property to the original level of risk which was present prior to the vacancy of the property. The trial court further determined that since the Mortgagees did not have the requisite control until after the completion of foreclosure proceedings to habitate the property, that Statutory Condition 4 did not apply to them, and that the Mortgagees were entitled to coverage under the policy.

State Farm appealed to the Ontario Court of Appeal and relied on American Home Assurance Co. v. Axa Assurances Inc., [2002] J.W. No. 343 in which the Quebec Court of Appeal, several months prior to the decision of Wilton-Siegel J., determined that an exclusion clause could be enforced against a mortgagee, when the mortgagee had taken possession of the insured property, prior to change of title, and did not notify the insurer of the change in risk. The Ontario Court of Appeal preferred the reasoning of Wilton-Siegel J. to that of the American Home Assurance Co., and upheld the lower court’s findings with respect to the vacancy provision in the insurance contract. However, the Court of Appeal overturned the decision of Wilton-Siegel J. with respect to the ruling on Statutory Condition Number 4 and determined that Statutory Condition Number 4 is directed at any material increase in risk. Although mortgagees cannot be said to have had control over the vacating of the property, they could have notified State Farm of the change in material risk. The Court disagreed with Wilton-Siegel J.’s limitation of the word “control” to situations in which the mortgagee is able to “restore the property to the original level of risk”. The Court of Appeal determined that a material increase in risk had occurred upon the vacating of the property, that the Mortgagees, as insureds in the policy, were responsible for any material increase in risk, and Statutory Condition Number 4 applied to void the policy. Had the Mortgagees provided State Farm with notice of the increase in risk they would have been entitled to coverage under the insurance policy. The appeal was allowed, and the Mortgagees were not entitled to benefits under the policy of insurance.

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