Property damage that would not be insured under a standard insurance policy to an occupant or owner, is insured under the standard mortgage clause for a mortgagee, when the damage is the result of an act or omission by the occupant or owner

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

Ms. Conrod owned a house and Assiniboine Credit Union (“Assiniboine”) held the first mortgage. The house was insured by Aviva Insurance (“Aviva”). On January 19, 2001, at the request of Ms. Conrad, but without the knowledge of Assiniboine, Aviva added a vacancy permit to their insurance coverage. The vacancy permit was renewed from time to time but never with the knowledge of Assiniboine. Assiniboine stopped receiving mortgage payments in the summer of 2002 and took possession of the property. Upon taking possession of the property, Assiniboine discovered that electricity to the property had been disconnected for non-payment resulting in the property being unheated during the winter of 2001-2002. As a result of the lack of heat, water in the plumbing system froze causing approximately $30,000 of damage. Assiniboine requested payment from Aviva through the standard mortgage clause in the contract of insurance.

Darichuk J. determined that Aviva was obligated to indemnify Assiniboine for the loss. He found that Aviva had been in breach of the terms of the policy when it failed to inform Assiniboine that a vacancy permit had been added to the property. Had Assiniboine been advised of the vacancy permit, it could have taken steps to protect its investment by arranging to make the property ready for winter.

On appeal, Aviva focused on the fact that the insurance policy provided no coverage for the type of loss incurred. It argued that Royal Bank of Canada v. Red River Valley Mutual Insurance Company (1986), 42 Man.R. (2d) 124, stood for the proposition that an Insurer cannot be liable for a loss pursuant to the terms of a standard mortgage clause if a loss is excluded by a term in the underlying policy. Assiniboine maintained that the decision in Royal Bank was not applicable, and argued that there would have been coverage under the terms of the underlying policy, but for the actions of the owner of the property. Because the actions of the owner of the property, in vacating the building, caused the damage, Assiniboine was entitled to rely upon the standard mortgage clause for indemnity.

The Ontario Court of Appeal examined the wording of the first paragraph of the standard mortgage clause, namely the fact that the clause “is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured”. The Court noted that the water damage exclusion in the underlying policy did not exclude recovery by Assiniboine, because the damage was in an area of the building that would have been heated had the building not been vacated. In effect, this was a loss covered by the policy except for an act, neglect or omission attributable to the owner. Monnin J.A., for the court, determined that Aviva was liable to Assiniboine for the damages caused to the property under the terms of the standard mortgage clause.

In concurring reasons, Kroft J.A. noted that although the ultimate decision of the Court was the same as the Queen’s Bench decision, the ruling by the Court of Appeal was that Aviva was liable to indemnify Assiniboine for its loss under the actual terms of the policy. Kroft J.A. stressed that this judgment was not intended to resolve for Insurers or their customers any questions concerning the form and nature of notice that should be used between them.

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