What is a Standard Mortgage Clause?

A standard mortgage clause is a term in all homeowner (property) insurance policies.  The standard mortgage clause protects the bank/lender/mortgage company for its interest in an insured’s home.  This means, that even if insurance coverage is denied to the insured homeowner, the mortgage lender will still be paid for the cost of the outstanding mortgage.

The Supreme Court of Canada has held that the standard mortgage clause is a separate contract between the insurance company and the mortgage lender that protects the mortgage lender’s interest regardless of any actions by the insured homeowner: National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029).  The mortgage lender’s interest is the value of the outstanding mortgage amount.

Therefore, by example an insured homeowner can burn down its property and be found on site with a match and a can of gasoline, however the mortgage lender is protected and the insurance company is required to pay out the outstanding mortgage amount.

However, once the mortgage is paid out by the insurance company, the insurance company can take an assignment of the debt and seek recovery against the person (even the homeowner) responsible for the loss.

So, in our example where the insured homeowner burnt down their own property their mortgage will be paid out by the insurance company, but the company could sue the insured homeowner for the cost of paying out the mortgage.

Even when a homeowner is not responsible for the loss or damage and is therefore entitled to receive the insurance proceeds under their insurance contract, their lender can insist on being paid first out of the insurance proceeds.

Section 8 of The Mortgage Act, C.C.S.M. c. M200 gives the mortgage lender the right to require all insurance proceeds payable to the homeowner be paid directly to the mortgage lender.  Section 8 states:

Application of insurance money by mortgagor

8(1)    All money payable on an insurance to a mortgagor shall, if the mortgagee so requires, be applied by the mortgagor in making good the loss or damage in respect of which the money is received.

Mortgagee may insist on money being paid to him

8(2)   Without prejudice to any obligation to the contrary imposed by law or by special contract, a mortgagee may require that all moneys received on an insurance be applied in or towards the discharge of the money due under his mortgage.

This legislation has been affirmed by the Courts, in particular in Bossio v. Nutok Corp. [2015] no. 933, at para. 177:

“177… The case law is clear that a mortgagee has the right to elect how the proceeds of the insurance policy on the mortgaged premises are to be applied to the extent of their interest…”

So, the takeaway from this information is that any homeowner who suffers a fire loss property loss should be sure to notify their mortgage lender of the loss and include them in the decisions regarding the insurance proceeds.  Open lines of communication and cooperation between the homeowner and their mortgage lender will help to effectively remedy the loss.

Christina is a civil litigator and corporate solicitor with a specific interest in insurance law. Christina has acted for various insurers across Canada and in the UK.  Christina is a member of the Canadian Defence Lawyers and the Defense Research Institute.  Christina also occasionally assists individuals navigate their insurance claim process and obtain indemnity under their policies of insurance. If you have a question about insurance law or civil litigation please contact Christina J. Cook.