Mortgage Broker

Summer 2018

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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legalease CMB MAGAZINE cmba-achc.ca summer 2018 | 31 BACKgROund In the usual situation of a homeowner with a mortgaged property, the homeowner, as required by the mortgage terms, obtains and pays for a policy of insurance in his or her name. at policy will cover the homeowner's interest in the property as well as the interest of the lender. It is common practice for such policies to contain what is known as a standard mortgage clause. Such a clause will protect the interest of a mortgagee despite an act of the insured homeowner that would otherwise breach policy conditions. WhaT haPPens When: n a borrower fails to insure the mortgaged property, n the lender obtains insurance naming itself as the insured, n the borrower reimburses the lender for paid premiums, n the property suffers damage, n the insurance company pays monies under the policy to the lender, n the insurance monies are not enough to cover the lender's interest and the lender seeks the balance from the borrower, and n the insurance company wants the borrower to reimburse it for the money it paid to the lender (this is called a subrogation claim)? WhAT hAPPEnEd In Hanson v. Totten Insurance Group Inc., 2018 ONCA 446, the borrowers were unable to obtain home insurance. As permitted to do so under the mortgage terms, the lender obtained insurance to cover its own risk and required the borrowers to reimburse the paid insurance premiums. e borrowers were told that the insurance policy did not cover them and they should obtain their own policy. e borrowers did not do so. e policy stated that it would protect only the interest of the named insured (the lender) and no other party. However, the mortgage provided: e [mortgagor] will immediately insure… the buildings on the land to the amount of not less than their full insurable value…; otherwise the [mortgagee] may provide therefor and charge the premium paid and interest thereon… to the [mortgagor]. e property was substantially damaged by fire and was ultimately demolished. e insurance company paid the full amount of the policy to the lender; the amount was not enough to cover the lender's total loss. nexT: n e lender sued the borrowers for the shortfall. n e insurer brought a subrogated claim against the borrowers for the monies it had paid to the lender. n e borrower brought a claim asking the court to order that the insurance covered their interest in the property as well so that the insurance payment to lenders extinguished the mortgage debt. dECISIOn e Ontario Court of Appeal ruled that: n the mortgage term permitted but did not require the lender to obtain the same coverage that the borrower was required to obtain. e lender was entitled to obtain coverage for its interest only. n the borrower was not entitled to coverage even though the borrower had reimbursed the lender for the insurance premiums. e policy required the borrower to bear the cost of insurance, including any insurance obtained by the lender. n the mortgage terms provided for the insurance benefit to be that of the lender alone. n because the borrowers are not covered by the policy and the insurer paid benefits to the lender, the insurer is entitled to step into the shoes of the lender (as provided for in the policy) to claim those monies back from the borrower. TAKEAWAyS Rights and obligations under an insurance policy are largely determined by the wording of the policy. Seemingly minor wording differences between policies can lead to dramatically different outcomes. Borrowers and lenders have very different interests in mortgaged properties. Each should ensure that any insurance policy obtained is in accordance with the mortgage terms and provide coverage for the intended parties. Mortgage brokers may want to make borrowers aware of the importance of obtaining and keeping appropriate levels of fire and peril insurance coverage on their property, ey may want to alert borrowers of the risks associated with failing to keep sufficient coverage in place. don'T geT Burned Why it's so important for borrowers to have their own property insurance By rAy BASi, ll.B., StAff edUcAtioN ANd policy reView

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