The Supreme Court of Canada held that the insurer was not entitled to rely on the statutory condition, with respect to material change to risk, to void coverage for loss arising from a fire while the property was vacant. The Court held that the statutory condition was in conflict with the mortgage clause in the policy.

Royal Bank of Canada v. State Farm Fire and Casualty Co., [2005] S.C.J. No. 34, Supreme Court of Canada

The insureds’ house was destroyed by a fire. At that time, the house was vacant because the insureds had earlier defaulted on their mortgages with the mortgagees. The mortgagees made an insurance claim pursuant to the standard mortgage clause in the policy. The insurer denied the claim because it had not been informed of the vacancy of the house. The insurer took the position that the vacancy was a “change material to the risk and within the control and knowledge” of the mortgagees. The insurer claimed that under statutory condition 4, it was entitled to void coverage. The Ontario Superior Court of Justice found that statutory condition 4 did not apply. The Court of Appeal set aside the decision and granted judgment in favour of the insurer.

The Supreme Court of Canada allowed the appeal and held that the insurer could not rely on statutory condition 4 to void coverage. Under statutory condition 4, any change material to the risk and within the control and knowledge of the insured voided the contract unless the insurer was promptly notified in writing of the change. The Supreme Court of Canada held that statutory condition 4 conflicted with the mortgage clause which provided that the terms of the mortgage clause “shall supersede any policy provisions and conflict therewith but only to the interest of the mortgagee”. The mortgage clause specifically provided that the insurance “is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non-vacancy”. The Court held that the insurer was not entitled to rely on the statutory condition to void coverage.

To stay current with the new case law and emerging legal issues in this area, subscribe here.