Mortgagee’s obligations towards the insurer
This summary does not constitute a legal opinion. The information it contains may not reflect the current state of the law.
A recent judgment of the Superior Court
Plaintiff, Richard Dubois is claiming from Wawanesa Insurance Company (hereinafter the “Insurer”) the amount of $593,131.99 following a fire that entirely destroyed his property. The Insurer refused to indemnify its insured alleging that the latter was, at the time of the underwriting, the author of false declarations.
Express Finance Investissement inc. (hereinafter “the Mortgagee”) is also claiming from the Insurer the sum of $158,691.68, which represents the balance due on the mortgage loan.
This recent judgement is quite interesting because, in addition to reiterating the principles regarding the ab initio nullity of an insurance contract, it deals with the consequences of the insured’s false declarations on the rights of the mortgagee.
On February 24, 2011, Plaintiff communicated with the Insurer’s underwriting department in order to obtain a home insurance policy. In answer to the questions asked, he mentioned that his house was a foreclosed property, the vendor being AGF, and that he purchased it through a finance company, since the bank was giving him the run around. In the light of the information received the Insurer accepted to insure Plaintiff’s property as of February 24, 2011.
In October 2011, under suspicious circumstances, the property burned down. The damages were so vast that property was declared a total loss.
In a nutshell, you will find below the real circumstances surrounding the purchase of the property, which were never disclosed to the Insurer:
- In November 2010, AGF became the owner of the property after it took it in payment from Réjean Dubois, owner of the property and Plaintiff’s father;
- Plaintiff tried to purchase the property but AGF refused because of his relationship with Réjean Dubois;
- On February 24, 2011, 9157-6520 Quebec inc. (hereinafter “9157”) purchased the property from AGF for the amount of $85,000. The purchase was financed by the Mortgagee who consented a loan of $92,000;
- Franco Cacchione, the sole shareholder of 9157, was a friend of the Dubois family and also a shylock;
- Plaintiff became the owner of the property on March 16, 2011 (and not on February 24, 2011);
- The purchase price was $92,850. The Mortgagee loaned to Plaintiff the sum of $125,000. The latter did not receive any money from the loan. In fact, the shylock received the balance in order to reimburse Plaintiff’s debts.
It was also proven that, in order to avoid eviction when AGF took the house in payment, the shylock suggested to Plaintiff’s father to rent the property for a two-year period. Réjean Dubois agreed. However, the shylock never lived in the house rather Plaintiff and his father did. Considering the existence of the lease, AGF had reduced the sale price, allowing the shylock to purchase the property at a price way below its market value.
Furthermore, the directing mind of the Mortgagee was linked to the organized crime and was killed in 2013.
Richard Dubois’ recourse
The judge reiterated the principle according to which a person who wishes to underwrite to an insurance contract must be of the utmost good faith. Otherwise, the insurance contract may be annulled if the insurer establishes that it wouldn’t have accepted the risk if it had known all of the circumstances.
The judge concluded that the Insurer met his burden of proof by establishing that the information that was not divulged by Plaintiff was of the nature to influence a “reasonable” insurer. As to Plaintiff, he did not demonstrate that he acted like a a diligent insured.
For those reasons, the judge dismissed Plaintiff’s action and declared the insurance policy null ab initio.
The Mortgagee’s recourse
A mortgage guarantee clause constitutes a contract between the insurer and the mortgagee, which is distinct from the insurance contract. Therefore, the insured’s deceitful declarations do not affect the contractual obligations of the insurer towards the mortgagee.
However, we cannot conclude that the mortgagee will be automatically indemnified by the insurer. The exceptional circumstances of the present case convinced the judge that the mortgage guarantee clause must also be declared null. The judge accepted the Insurer’s allegation to the effect that the Mortgagee constituted an unacceptable risk because of the illicit activities of its directing mind. However, there is more. The moral risk may also be evaluated in light of the circumstances surrounding the underwriting. On February 24, 2011, the Mortgagee knew that the owner of the property was 9157 and not the Plaintiff. Consequently, the insurance policy was invalid. Also, the Mortgagee knew about the relationship between Plaintiff and the shylock. In this regard, the judge wrote:
[..] la preuve prépondérante permet au Tribunal de douter sérieusement de la bonne foi du prêteur hypothécaire dans cette sinistre affaire, incluant le moment où Wawanesa a émis la clause de garantie hypothécaire à la demande de Richard.
Express Finance tente de se prévaloir d’une clause de garantie hypothécaire émise dans des circonstances où le prêteur savait pertinemment bien que le jour de l’émission de la Police, ce n’était pas Richard qui se portait acquéreur de la Propriété mais plutôt le « Shylock » Cacchione […]
[…] Express Finance qui tente de se prévaloir de la clause de garantie hypothécaire obtenue par l’entremise de Richard, n’a jamais agi dans la présente affaire comme un prêteur de bonne foi.
Finally, the evidence was lacking regarding the amount due by Plaintiff.
Similarly to Plaintiff’s recourse, the Mortgagee’s claim was dismissed.
Despite its unusual facts, this recent judgement of the Superior Court is interesting for many reasons.
It reiterates the well-known principles regarding deceitful declarations. Furthermore, it confirms that the insured’s deceitful declarations are not enforceable against the mortgagee. However, the actions of the latter will be evaluated when the validity of the mortgage guarantee clause is contested.
By Me Caroline Tremblay, Gilbert Simard Tremblay, s.e.n.c.r.l.