S.C.A. No. 02514
NOVA SCOTIA COURT OF APPEAL
Hallett, Freeman, and Roscoe, JJ.A.
Cite as: Commercial Union Assurance Company of Canada v. Bank of Nova Scotia,
B E T W E E N:
COMMERCIAL UNION ASSURANCE ) Christopher C. Robinson
COMPANY OF CANADA ) for appellant
)
appellant )
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- and - ) Lloyd Berliner
) for respondent
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THE BANK OF NOVA SCOTIA )
)
respondent ) Appeal Heard:
) March 26, 1993
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) Judgment Delivered:
) June 25, 1993
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)
)
)
THE COURT: Appeal dismissed from judgment holding insurer liable to mortgagee bank when mortgaged premises burned shortly after insurance lapsed without notice to bank, per reasons for judgment of Freeman, J.A., concurred in by Roscoe, J.A.; Hallett, J.A. dissenting on grounds insurer had no duty to notify bank of impending lapse of policy.
FREEMAN, J.A.:
The issue in this appeal is whether an insurer owes a duty to a mortgagee, named in a homeowners insurance policy as the payee in the event of loss, to notify the mortgagee when the policy is being allowed to lapse at the expiry of the policy period.
The home of Robert and Rhonda Vatcher of Tatamagouche, N.S., was insured for $55,000 with the appellant, Commercial Union Assurance Company of Canada, through the agency of Major Brothers Limited of Halifax. The respondent, the Bank of Nova Scotia, was the named mortgagee and had a copy of the policy. The face of the policy stated that the "policy period" was from February 8, 1987 to February 8, 1988. There was no statement that the policy expired on that latter date, nor that insurance coverage would terminate then.
By a letter dated October 21, 1987 Major Brothers advised the Vatchers that their policy was to expire on February 8, 1988 and asked for instructions. A second letter dated January 15, 1988, asked Mr. Vatcher to inform them if he wished a renewal policy and advised that if they had not heard from him by February 8, 1988 they would allow the policy to lapse. The Bank of Nova Scotia was not copied in those letters, but it did receive a copy of a February 8 letter to Mr. Vatcher advising that the policy had been lapsed at 12:01 a.m. that day.
There was evidence in the form of notes of Ms. Veronica Johnson, a customer service representative of Major Brothers at relevant times, that Mr. Vatcher made contact with Major Brothers to renew the policy on February 10, 1988, and was refused not because the policy had lapsed but because the house was unoccupied. A renewal policy had been prepared for the policy period February 8, 1988 to February 8, 1989, but was stamped cancelled dated February 8, 1988.
On February 11, 1988, the Vatchers' house burned down. The bank's mortgage officer received the letter from the insurance agent later that same day.
The bank filed a proof of loss claiming about $33,000 owed on two mortgages on the property. Commercial Union rejected the claim on the basis that the policy was no longer in force.
In finding the appellant liable to the bank Mr. Justice Gordon Tidman of the Supreme Court of Nova Scotia stated:
"Although the Insurance Act imposes upon the insurer the obligation to give notice only of cancellation and alteration I find that the Standard Mortgage Clause imposes upon the defendant insurer the additional and contractual obligation to give notice of policy termination including termination by way of lapse."
S. 168(1) of the Insurance Act, R.S.N.S. 1989 c. 231, provides:
"168(1) Where the loss, if any, under a contract has, with the consent of the insurer, been made payable to a person other than the insured, the insurer shall not cancel or alter the policy to the prejudice of that person without notice to him."
This is the source of the statutory duty to notify in the event of cancellation of the policy to which Mr. Justice Tidman referred. The contractual duty to which he referred derives from Paragraph 5 of the Standard Mortgage Clause, entitled "Termination".
The Standard Mortgage Clause in the present policy, approved by the Insurance Bureau of Canada, provides in Paragraph 5:
"5. 'Termination'
The term of this mortgage clause coincides with the term of the policy.
PROVIDED ALWAYS that the Insurer reserves the right to cancel the policy as provided by the statutory provision but agrees that the insurer will neither terminate nor alter the policy to the prejudice of the Mortgagee without the notice stipulated in such Statutory provision."
The statutory condition states that "this contract may be terminated . . . by the insurer giving to the insured 15 days notice of termination by registered mail or 5 days written notice of termination personally delivered."
While the literal meaning of "notice stipulated in such Statutory provision" seems obscure as it relates to a mortgagee, Paragraph 5 is clear in creating a right to notice of termination in mortgagees. The extent of that right is at issue. However it would not be unreasonable for a mortgagee to conclude that the insurer has accepted a duty to inform him in advance of termination of the insurance coverage for any reason.
It is significant that, after a reference to cancellation of the policy, the Insurance Bureau of Canada approved the broader word "terminate" to be used in connection with a duty to notify. If the language of Paragraph 5 does not clearly require notification to a mortgagee before a policy is lapsed, it is at least ambiguous requiring interpretation.
Mr. Justice Tidman reached his conclusion after considering Traders Group Ltd. v. Stanley Mutual Fire Insurance Co. (1983), I.L.R. 1-1691, (N.B.Q.B.), which was followed in Canadian Imperial Bank of Commerce v. General Accident Assurance Co. of Canada (1992), 8 C.C.L.I. (2d) 193 (B.C.S.C.). Both cases interpreted provisions similar to those in the present policy and concluded that the insurer owed no duty to notify the mortgagee when the insurance was terminated upon expiry of the term of the contract.
It is clear that the policy period ended on the stated date, that is to say, any coverage beyond that date generated a fresh right in the insurer to receive a premium from the insured for the new period. If arrangements had not been made for payment of the premium, the insurer was not bound to continue coverage after that date. In my view, that is not the same as saying the insurance coverage was intended to terminate on that date without notice. The insurer and the agent continue to exert some degree of control over the continuation of coverage beyond the end of the policy period. A stranger to the contract between the insured and the insurer could not say with certainty, in the absence of notice, that insurance coverage ceased at the end of the period stated in the policy.
If insurers recognized no duty to notify the mortgagee upon lapses at the end of the policy period, the first line of the termination provisions in Paragraph 5 need only have stated: "The term of this mortgage clause coincides with the term of the policy, which shall terminate without notice upon expiry." Instead, the language used appears to have the effect of extending the term of the mortgage clause to the terms of renewals. The first paragraph of the Standard Mortgage Clause contemplates renewals; it begins, "This insurance and every documented renewal thereof . . . " The expectation of all parties to a contract of insurance such as the one in question is that it will be renewed, as the letters from Major Brothers to the insured suggest. It is also suggested by the absence of any notice of expiry from the face of the policy, and the use of the gentler term "policy period."
"Terminate" is a broad term, as the Insurance Bureau of Canada must have been aware. It is broad enough to include discontinuance of insurance coverage for any reason, including cancellation, non-renewal, lapse or expiry. It is used in this broad sense as the heading of Paragraph 5, following which were references to both the term of the policy and to cancellation. If it was intended that different types of termination carried differing duties to notify, the Standard Mortgage Clause had only to say so. If a mortgagee was not entitled to rely on receipt of notification before insurance coverage was removed from its security, different language should have been employed. The wording of the paragraph creates an obvious nexus between the concepts of termination and notice in a contract intended to be widely used by persons not involved in negotiating the choice of language. If it is intended to be read in a narrow or refined manner or given a specialized meaning, such an intention should be made clear.
There is undeniable logic in the argument that a contract with a fixed expiry date--if that is the meaning of "policy period"--should terminate on that date without the need for further notice. But in common contractual relationships such logic is not always the governing factor; residential leases for a fixed period, for example, do not end on their termination date without additional notice. An insurance clause is included in virtually every mortgage. While the insurance policy is usually written for a year at a time for an annual premium, the intention of all parties is that the insurance coverage will be renewed to continue without interruption. The mortgagor owes a duty to the mortgagee to keep the property insured for the duration of the mortgage, and that is commonly accomplished through repeated renewals. As suggested above, the expiry of the "policy period" has more to do with the beginning of a new premium period than with the end of the coverage.
The source of the definition of "termination" in Black's Legal Dictionary is Waynesville Security Bank v. Stuyvesant Insurance Company, Mo. App. 499 S.W. (2nd) 218 at p. 220, in which the Missouri Court of Appeal stated:
"' Cancellation' as used in insurance law means termination of a policy prior to the expiration of the policy period by the act of one or all of the parties; 'termination' refers to the expiration of a policy by lapse of the policy period."
The bank's routine regarding insurance on mortgaged property was obviously based on reliance that it would be notified when the insurance was to be terminated. It was described in the evidence of John Gavin Thompson, senior consumer credit officer with the Bank of Nova Scotia in Truro:
Q. What was your practice or the practice of the Bank of Nova Scotia at the time regarding renewals of insurance in respect of property secured by mortgages?
A. The insurance would be in place until expiry. Normally we would get a 15-day notice from the insurance company that the insurance is to expire and that would come by registered mail. Once we got the registered mail then we'd generally try to contact the customer and find out if the insurance was going to be put in place or if there was a problem. If they had a problem we would sometimes pay the insurance, add it to the loan. We'd contact the insurance company and make arrangements to see if they would carry the insurance forward. Sometimes they would be cancelling and they wouldn't want to reinsure, at which point we'd have to find a new insurance company. Sometimes all they'd want is their money, at which point we would either debit the customer's account, charge it to their loan or make arrangements with a customer to pay it.
Q. What if the insurer did not send you the 15 days notice?
A. If they didn't, we wouldn't find out about it.
It appears from this passage that insurers recognize the duty to notify mortgagees when insurance is about to terminate for whatever reason, and that the 15-day notice has a recognized place in the way business is carried on. The evidence is insufficient, however, to have permitted a finding as to customary practice.
To my mind it is unrealistic to assume that insurance coverage is likely to end at the expiry of the policy period, even if the premium is not paid. The coverage might be under negotiation between the insured and the insurer, or the insured might have a credit arrangement with the agent that would keep the policy from lapsing. It is of interest that the policy in the present case did not lapse by mere passage of time. The agent purported to terminate it deliberately by allowing it to lapse. The January 15 notice letter to Mr. Vatcher stated:
"Your Homeowners insurance policy covering your property at 308 Main Street, Tatamagouche, N.S. is due for renewal on February 8, 1988 for a premium in the amount of $238.00 for a further term.
I wrote to both yourself and Mrs. Vatcher, back in October 1987, with regards to the disposition of your Automobile and Homeowners policies, now that you are separated from one another.
To date I have not received a reply, therefore the reason for this writing.
Kindly contact this office and inform us if you require the Homeowners renewal policy, or forward your payment of same, at which time we shall forward your renewal policy to you.
If we do not hear from you on or before February 8, 1988, we shall assume that this coverage is no longer required and we shall allow your policy to lapse effective 12:01 a.m. February 8, 1988."(emphasis added.)
The letter of February 8, 1988, stated:
"With reference to our letter of January 15, 1988, please be advised that since we have not received any response to same, , we have had no other alternative than to assume that coverage is no longer required through our agency and we have hereby lapsed the above policy covering your residence effective 12:01 a.m. February 8, 1988." (emphasis added)
If the agent recognized a duty to warn the insured of the risk that the policy would be lapsed if arrangements were not made for paying the premium, surely a similar duty would be owed under its contract with the bank, even in the absence of the language in Paragraph 5.
To relieve the insurer of the obligation to notify the mortgagee of the termination of insurance coverage, thus making the mortgagee responsible for monitoring the state of negotiations between the insurer and the agent, would be to needlessly impose on the mortgagee a difficult burden that would add to the cost of doing business. Terminating a policy for any reason is a conscious act, engaging the serious intention of the insurer in a series of steps made necessary by statute, contract or good business practice. Notifying a mortgagee is merely one such step, a routine and simple one for the insurer, arising out of the separate contractual relationship existing between the insurer and the mortgagee. See Le Groupe Estrie-Richelieu, Compagnie d'Assurance v. Caisse Populaire des Deux Rives (1990), S.C.C. #21005 and Royal Insurance Company of Canada v. Trans Canada Credit Corporation Limited (1983), 1 C.C.L.I. 300 at p. 305.
In the Estrie-Richelieu case the Supreme Court of Canada found the insurer liable to the mortgagee as a result of the separate contract created by the Standard Mortgage Clause even when the insured mortgagor had burned down the insured building by his own deliberate act. L'Heureux-Dubé J. traced the clause to the standard or "New York Union" clause which appeared in the State of New York in the mid-1870s: Guerin v. Manchester Fire Assurance Co. (1898), 29 S.C.R. 139, at p. 162.
In examining the first paragraph of the standard mortgage clause, known as the hypothecary clause in Quebec, Madam Justice L'Heureux-Dubé concluded that it establishes an interest in the mortgagee distinct from that of the insured under the policy. The paragraph she quoted is similar in all material respects to the clause in the present policy, which is as follows:
"This insurance and every documented renewal thereof--AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN--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-occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk; . . . "
In reviewing United States practice Madam Justice L'Heureux-Dubé wrote:
" The United States Supreme Court has had occasion to discuss the relationship between mortgagee and insurer in Aetna Insurance Co. v. Kennedy, 301 U.S. 389 (1937). Considering a clause, the wording of which was very similar to that at issue here, the Supreme Court adopted the interpretation that the mortgage clause created two separate contracts in the same policy (Butler J., for the court, at p. 395):
'Kenney [the mortgagee] was not merely a designated beneficiary to whom was payable, as specified, insurance obtained by the bank. The mortgagee clause created a contract of insurance between him and the company and effected separate insurance upon his interest. [Emphasis added in S.C.R.).'
"With a few rare exceptions, U.S. decisions have unanimously adopted the same approach to this question. Couch (Couch on Insurance (2nd. ed. 1982), vol. 10A, § 42:728) summarizes these decisions as follows:
'42:728. Mortgagee and insurer: Concept of independent contract.
Under the standard or union mortgage clause, an independent or separate contract or undertaking exists between the mortgagee and the insurer, which contract is measured by the terms of the mortgage clause itself. There are accordingly in substance two contracts of insurance, the one with the mortgagee, and the other with the mortgagor. The mortgagee does not have the status of a beneficiary, and the effect is the same as though the mortgagee had procured a separate policy naming himself as the insured.'
" The consideration for the insurer's undertaking with respect to the mortgage under the standard clause is the consideration for which the policy was itself issued to the mortgagor, and a standard mortgage clause creates a separate contract between the insurer and the mortgagee, and is enforceable by the mortgagee, even though it is merely engrafted onto the policy delivered to the mortgagor." [Emphasis added--footnotes omitted in S.C.R.]"
The question of the separate contract was not settled in Canada until London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10. Madam Justice L'Heureux-Dubé stated at pp. 1019-20:
" Shortly after this decision, many Canadian appellate courts unequivocally adopted the interpretation recognizing that two contracts exist in the same policy where there is a mortgage clause. Thus, the Appeal Division of the Nova Scotia Supreme Court wrote in Royal Insurance Co of Canada v. Trans Canada Credit Corp. (1983), 1 C.C.L.I. 300 at p. 305 (Jones J.A. for the court):
' It is now clear from the decision of the Supreme Court of Canada in Bonser v. London & Midland Gen. Ins. Co., supra, that the standard mortgage clause constitutes a separate agreement between the insurer and the mortgagee.'
". . . Finally, a very recent decision of the Alberta Court of Appeal, National Bank of Canada v. Co-Operators General Insurance Co. (1988), 90 A.R. 295, explains the formation of the second contract by the existence of a contract of agency between the mortgagee and the mortgagor. Discussing the same mortgage clause as the one in question here. Laycraft C.J. wrote for the court (at p. 302):
' In my opinion, this mortgage clause contains the terms of a separate, independent contract of insurance between mortgagee and insurer engrafted on to the policy delivered to the mortgagor. It incorporates other terms of the policy (as, for example, the property description or amount of coverage) to the extent they are applicable.
. . .
The agency of the borrower to effect the insurance on behalf of the lender seems to me to be necessarily implicit in the borrower's covenant to insure universally seen in debentures and mortgages. All parties to the transaction, including the insurer who is eventually approached, know that the borrower must obtain a mortgage clause in favour of the lender if it is to proceed. That seems to me to be virtually a definition of the role of the borrower as an agent for that limited purpose. His role is so obvious to insurers that the industry has a "standard mortgage clause" ready to meet the request. [Emphasis added in S.C.C.]'"
In my view it follows from the nature of the contractual relationship, quite apart from the language used in Paragraph 5 of the Standard Mortgage Clause, that the insurer owes a duty to mortgagee to inform it of the termination of the contract. The insurer acknowledges the contract in the policy, of which the mortgagee is given a copy. That contractual relationship must be brought to an end by an act of the contracting parties, the insurer and the bank, and not by the act of another party, the mortgagor-insured, to another contract, an act of which the mortgagee can be expected to know nothing. The mortgagor's covenant with the mortgagee is to keep the property insured during the life of the loan, and the insurer entered into a contract with the mortgagee because of that covenant. In the normal course of events, the property would remain insured with the same insurer. Experienced players such as the bank and the insurer would not expect coverage to end on the expiry of the policy period. Normally, the agent simply sends a bill to the insured, who pays it. The mortgagee will know nothing of this and indeed, can be expected to know nothing, unless it has an employee make repeated contacts with the agent or the insurer as the expiry date of the policy approaches. In the case, for example, of a fifteen-year mortgage in its twelfth year, which the mortgagor has kept insured from the outset without incident, such a practice would appear absurd. There is no reason for this expenditure of labour because, as Mr. Thompson testified, insurers give fifteen-day notices to the mortgagee if coverage appears likely to be terminated. Mr. Thompson testified this happens in fifteen per cent of cases; when it does his bank gets involved and sees that the secured property is insured, making the money available if the borrower is short of funds. To my mind the overwhelming weight of practicality and convenience favours this arrangement. The apparent dearth of cases directly on point no doubt may well exist because the matter is so well settled between insurers and mortgagees.
In Forbes Chevrolet Oldsmobile Ltd. v. Home Insurance Co. (1990), 107 N.S.R. (2d) 203 (S,.C.T.D.) Mr. Justice Davison held that an interpretation of a commercial contract which defeats the intention of the parties should be discarded in favour of an interpretation which promotes a sensible commercial result. He stated at p. 205:
" The Supreme Court of Canada has set out guidelines for interpreting insurance policies in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co. [1980] 1 S.C.R. 888; 32 N.R. 488, at 901:
' Even apart from the doctrine of contra proferentum as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result.'"
Given the practical necessity for mortgagees to be notified when insurers intend to terminate their contracts with them, and given that receipt of notices of impending lapse is commonplace with the bank, I can only conclude that when an insurer says, as it does in Paragraph 5 of the Standard Mortgage Clause, that it will "neither terminate nor alter the policy to the prejudice of the Mortgagee without notice," it means exactly what a bank employee or other reasonable person would conclude it means. That is, the Bank could rely upon its security being covered by insurance until the insurer gave it 15 days notice to the contrary.
The problem in the present case is that the agent simply failed to notify the bank; it had only to send a copy of the January 17th letter. It failed in its duty as an agent for the insurer. The insurer is liable to the bank in contract. As Mr. Justice Tidman suggests, there may also be tort liability, but it is not necessary to decide that point.
In my opinion Mr. Justice Tidman made no reversible error of fact or law in finding the appellant liable to the respondent. I would dismiss the appeal with costs which I would fix at $1,000 plus disbursements.
Freeman, J.A.
Concurred in: Roscoe, J.A.
HALLETT, J.A. (Dissenting)
I have read the decision of Mr. Justice Freeman. I cannot agree with his interpretation of the contract between the insurer and the mortgagee as created by the standard mortgage clause. In my opinion the learned trial judge misinterpreted the provisions of the mortgage clause; it must be read in conjunction with Statutory Condition 5 of the policy. The learned trial judge decided that a lapse of the policy due to the expiry of the period of coverage was a termination. The relevant contractual provisions under consideration are part of Clause 5 of the standard mortgage clause and Statutory Condition 5 of the policy.
The relevant part of Clause 5 of the standard mortgage clause is the following:
" 5. Termination
The term of this mortgage clause coincides with the term of the policy;
PROVIDED ALWAYS that the Insurer reserves the right to cancel the policy as provided by Statutory provision but agrees that the Insurer will neither terminate nor alter the policy to the prejudice of the Mortgagee without the notice stipulated in such Statutory provision."
Condition 5 of the policy provides:
" 5. Termination of Insurance:
(1) This contract may be terminated,
(a) by the Insurer giving to the Insured 15 days' notice of termination by registered mail or 5 days' written notice of termination personally delivered;
(b) by the Insured at any time on request.
(2) Where this contract is terminated by the Insurer,
(a) the Insurer shall refund the excess of premium actually paid by the Insured over the pro rata premium for the expired time, but in no event shall the pro rata premium for the expired time be deemed to be less than any minimum retained premium specified; and
(b) the refund shall accompany the notice unless the premium is subject to adjustment or determination as to amount, in which case the refund shall be made as soon as practicable.
(3) Where this contract is terminated by the Insured, the Insurer shall refund as soon as practicable the excess of premium actually paid by the Insured over the short rate premium for the expired time, but in no event shall the short rate premium for the expired time be deemed to be less than any minimum retained premium specified.
(4) The refund may be made by money, postal or express company money order, or by cheque payable at par.
(5) The 15 days mentioned in clause (a) of subcondition (1) of this condition commences to run on the day following the receipt of the registered letter at the post office to which it is addressed."
The standard mortgage clause also provides:
" SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shall supersede any policy provisions in conflict therewith BUT ONLY AS TO THE INTEREST OF THE MORTGAGEE), loss under this policy is made payable to the Mortgagee."
This latter clause means that if there is a conflict between the mortgage clause and the policy provisions respecting termination, the former would govern. In my opinion, there was not a termination; therefore, this proviso is not relevant.
The learned trial judge, after reviewing the law, concluded as follows:
" The Act [by section 168(1)] imposes on an insurer the obligation not to cancel or alter the policy to the prejudice of the mortgagee without notice to him. However, the insurers obligation described in the Standard Mortgage Clause in the policy deals not only with cancellation and alteration but also with termination. It states:
"PROVIDED ALWAYS that the Insurer reserves the right to cancel the policy as provided by Statutory provision but agrees that the Insurer will neither terminate (emphasis added) nor alter the policy to the prejudice of the Mortgagee without the notice stipulated in such Statutory provision".
Thus it is important to consider not only the meaning of "expiration" as opposed to "termination", but also the meaning of "termination" as opposed to "cancellation". Black's Law Dictionary (5th Ed.) definition of "cancellation" includes the following:
"To destroy the force, effectiveness, or validity of. To annul or abrogate."
Thus cancellation used in relation to an insurance policy implies the bringing to an end of the policy during its term, i.e., for some reason rendering invalid what would otherwise be valid.
If "cancellation" as used in the mortgage clause refers to ending the policy before its terms has expired, then the subsequent reference to "termination" rather than "cancellation" implies an obligation of the insurer upon "termination" of the policy in addition to its obligation upon "cancellation" and "alteration". Termination would, in my view, include an ending of the contract by time lapse."
In my opinion the meaning of the words "termination" or "terminate" as used in the contract, requires the taking of some positive action by the insurer to put an end to the contract before it expires. In this case the contract between the insurer and the mortgagee had simply lapsed as the period of the coverage was at an end. It was not terminated by the insurer; it simply came to an end in accordance with the terms of the agreement made between the mortgagee and the insurer. In my opinion that is not a termination by the insurer. Statutory Condition 5 clearly deals with termination before the contract coverage period had expired. This is so because paragraphs 2(a), (b) and (3) of Statutory Condition 5 make reference to refunding excess premiums paid. Premiums paid for the whole term of the policy are not refunded when the policy is in force for its full term.
In my opinion Clause 5 of the standard mortgage clause is intended to permit the insurer to cancel the contract in the event there is a material change to the risk as provided by the Statutory Condition relating to material changes of risk. Pursuant to Clause 5 the insurer also agrees with the mortgagee that the insurer will neither terminate nor alter the policy to the prejudice of the mortgagee without the notice "stipulated in such statutory provision". The only statutory provision that would be relevant would be Statutory Condition 5 dealing with "termination"; that condition, on any reasonable interpretation, is intended to cover situations where the policy is terminated by the insurer before it expires as provided in the contract. Section 168 of the Act is not relevant as it deals with cancellation or alteration of the policy by the insurer. In my opinion when a policy expires because its term has ended it cannot be said to have been cancelled by the insurer.
I agree with the reasonings in Traders Group Ltd. v. Stanley Mutual Fire Insurance Co. et al [1983] I.L.R. 1-1691 (N.B.Q.B.); Janes et al v. Co-operative Fire & Casualty Co. (1983), 2 C.C. L.I. 64 (Nfld. Dist. Ct.) and in Canadian Imperial Bank of Commerce v. General Accident Assurance Co. of Canada (1992), 8 C.C.L.I. 158 (B.C.S.C.) that terminate means to put an end to the contract by a positive act of the insurer; it does not encompass the expiration of the insurance contract at the end of the period of coverage.
In the Traders case Kelly J. stated at p. 6515:
" To equate 'termination' with 'expiration' in the mortgage clause as was argued by Counsel would be to require the insurer to give notice of the obvious - an expiry date already known. In addition, if such were the case, failure of the insurer to do so would impose on the insurer the obligation of keeping the policy in force beyond the contractual period and thus altering an agreed term of the contract. Surely this is not the purpose of the mortgage clause; nor can it be said in circumstances where the policy has reached its term that it is the insurer who has terminated the policy, for its termination is not the result to an act of the insurer but rather the inevitable conclusion of the earlier agreement between the parties. Thus 'terminate' in the mortgage clause means to end a policy of insurance by some positive act and does not include a termination (expiration) which occurs from the mere passage of time."
In the Canadian Imperial Bank of Commerce case Anderson J., after quoting the above passage stated at p. 196:
" The logic of these remarks is unassailable: the lapse of an insurance policy by the passage of time cannot be equated to cancellation or termination."
The lapse of a policy due to the policy term having come to an end is not a termination by the insurer. Therefore the appellant was not required pursuant to Clause 5 of the contract between the insurer and the mortgagee to give the mortgagee a 15-day termination notice as required by statutory condition 5.
Having interpreted the contract in a manner favourable to the mortgagee it was not necessary for the learned trial judge to make a finding as to whether the insurer owed a duty of care to the mortgagee (apart from contract) to advise the mortgagee that the policy would lapse on February 8. The evidence shows that the mortgagee had a copy of the policy and would have known when the period of coverage would expire. The mortgagee did not have any system to ensure that policies were renewed. There was no evidence to prove that it was a custom of the insurance industry to advise mortgagees in advance that fire policies on real property securing loans would expire on the date the coverage ended and that mortgagees relied on receiving such notification. The evidence called at trial simply does not prove there was a custom in the insurance industry that insurers had assumed a duty of care (beyond the terms of the contract) to mortgagees in these circumstances. What little evidence there was before the trial judge was not independent evidence and was conflicting. The evidence of Mr. Thompson falls far short of proving a trade custom; it was not independent evidence which is normally required to prove that a custom exists which has gained the status of being an implied term in certain business transactions. Furthermore, Mrs. Veronica Johnson who was employed by the insurer's agent, Major Brothers, testified that in her experience notices were not sent to mortgagees advising that a policy would shortly expire although agents do so advise the insured. Mrs. Johnson had almost 35 years experience in the industry. Extending a courtesy by mailing a notice to an insured or to a mortgagee that a policy is about to expire is no doubt a good business practice for agents as it may result in the policy being renewed. Insureds, generally, look to their agent do to so and agents may be liable if they fail. However, an insurer, in the absence of proper evidence of such a custom of the industry and that mortgagees rely on receiving such a notice, has no obligation to give notice to a mortgagee that a policy is about to expire. The evidence before the learned trial judge fell far short of proving that such an obligation should be implied.
The purpose of clause 5 of the mortgage clause is to prevent an insurer from terminating a policy prior to its expiration date without giving notice to the mortgagee; that makes sense as the mortgagee has an interest and would not otherwise know of the transaction. However, the mortgagee that has a copy of the policy already knows when it will expire. With respect to those who hold a different view I am of the opinion that it is torturing the language used in the insurance contract to read into Clause 5 that the parties intended that the insurer would be required to give a notice to the mortgagee that the coverage would be expiring at the end of its term. The mortgagee that fails to keep track of when policies will expire is the author of its own misfortune if a fire destroys the real property securing a loan after the insurance coverage has expired.
I would note that in the Waynesville Security Bank case referred to by Mr. Justice Freeman the Missouri Court of Appeal held that, absent (i) a policy provision; (ii) a statutory requirement; or (iii) a custom or course of dealings between the contracting parties which dictated that the insured or a mortgagee to whom loss is payable under a fire policy be given notice of expiration of the policy at the end of its term, neither the insured or the mortgagee is entitled to such a notice and opportunity to renew the policy. While there is dicta in the case that the word "termination" for purposes of insurance refers to the expiration of a policy by lapse of the policy, the ratio of the case is that the insurer was not required to give notice of the expiry of the policy to the mortgagee. The Court of Appeal, on facts that are similar to those in the case we have under consideration, stated that the mortgagee's arguments were "cleverly contrived but unsound". In that case the parties were arguing over the meaning of the word "cancellation". Although the court stated that cancellation, as used in insurance law means termination of a policy prior to the expiration of the policy and that "termination" refers to expiry of the policy by lapse, it is to be noted that the court held that the mortgagee was not entitled to notice in that case. The overriding conclusion of the Court was that absent contractual provisions or statutory requirements a mortgagee is not entitled to notice of the expiration of a policy or notice of non-renewal. The Court concluded after referring to a number of decisions:
" These decisions are but illustrative, of course, but they do demonstrate the general principle applicable to this case. No duty rests upon an insurer to notify the insured of the expiration date of his policy, or of its intention not to renew the policy, unless such notice is required by agreement of the parties or by statute, or unless the insurer has by custom or course of dealing with the particular insured led him to believe such notice would be given. Because in this case the duty owed to the plaintiff [the mortgagee] was no greater than the duty owed to the insured, so far as notice of the expiration of the policy is concerned, defendant was not required to notify the plaintiff that the policy would expire by lapse of the policy period on December 9, 1970. With deference to the trial court, whose judgment we respect, we believe the conclusion drawn from the stipulated facts was clearly erroneous."
In reviewing the mortgage clause, a mortgagee with a copy of the policy plainly showing on its face the date of the expiry of the coverage would not have a reasonable expectation that the insurer would be required to give notice of the obvious.
. In summary the only obligations or duties owed by the appellant to the mortgagee are those imposed by the Insurance Act and the insurance contract. Such obligations, on my interpretation of the standard mortgage clause, do not include notifying a mortgagee of the impending lapse of a policy due to the period of insurance coverage having come to an end. An insurer is not obliged to relieve the mortgagee from exercising prudence in the conduct of its business. A mortgagee can very easily monitor expiry dates of fire insurance policies covering properties on which the mortgagee holds security. There was no obligation on the appellant insurer to advise the respondent mortgagee prior to February 8th, 1988, that the fire insurance policy on the residence that secured its loan would lapse. I would allow the appeal with costs.
J.A.
S.C.C. No. 02514
NOVA SCOTIA COURT OF APPEAL
B E T W E E N:
COMMERCIAL UNION ASSURANCE ) REASONS FOR
COMPANY OF CANADA )
) JUDGMENT BY:
appellant )
) FREEMAN, J.A.
)
- and - ) HALLETT, J.A. (Dissenting)
)
THE BANK OF NOVA SCOTIA )
)
respondent )