Insurer’s subrogation right under Standard Mortgage Clause must establish no liability to the insured: Ontario court

The subrogation right of an insurer under the Standard Mortgage Clause in an insurance policy cannot be exercised simply upon the insurer paying the loss award to a mortgagee without the insurer also establishing — as opposed to merely asserting — that it has no liability to the insured, the Ontario Court of Appeal has ruled.
The court came to this conclusion on Nov. 26 in Farmers’ Mutual Insurance Company (Lindsay) v. Pinder, which overturned a lower court ruling.
On Feb. 2, 2004, a fire occurred at the home of Joyce and Cindy Pinder.
The Pinders submitted a claim to their home insurer, Farmers’ Mutual Insurance Company, seeking Cdn$302,412 for repairs to the house, damage to their contents and additional living expenses.
Farmers‘ Mutual denied the Pinders’ claim in May 2004 on the grounds that they had failed to notify the insurer of a material change in the risk, namely a change in the heating system of the premises, and that they had allegedly made false statements concerning their contents claim (a claim that has not been proven in court).
On July 21, 2004, the mortgagee, the Bank of Montreal, submitted a proof of loss seeking payment of the mortgage under the Standard Mortgage Clause of the policy in the amount of Cdn$99,293.09.
Farmer’s Mutual paid the bank the principal balance only, Cdn$97,143.97, arguing that interest, penalties and discharge fees were not covered by the policy.
The Pinders then commenced an action seeking a declaration that their insurance policy valid and binding, an action that has yet to be tried.
The insurer responded with a motion for summary judgment dismissing the Pinders’ claim, which the lower court so ordered.
The insurer also claimed the right of subrogation under the Standard Mortgage Clause, claiming from the Pinders the sum of Cdn$97,143.97 that it paid the bank on the mortgage.
The Standard Mortgage Clause states: “Whenever the insurer pays the mortgagee any loss award under this policy and claims that – as to the mortgagor or owner [i.e. in this case, the Pinders] – no liability therefore existed, it shall be legally subrogated to all rights of the mortgagee against the insured.”
The Court of Appeal found that the applicable section of the Standard Mortgage Clause contains two parts.
The first is that the insurer paid the bank, which in this case was not at issue.
But as for the second part, the insurer had done no more than articulate — i.e. by denying the claim — that it had no liability to the insured, the court found.
“Read literally, the [phrase “no liability therefore existed”] could mean that, having made a payment to the mortgagee, the insurer‘s right of subrogation [to collect from the Pinders] would be triggered by the mere articulation of a claim that it is had no liability to the mortgagor or owner for the loss award under the
policy,” the Ontario Court of Appeal wrote. “Such a meaning would seem inconsistent with the insurance policy considered as a whole within its commercial context….
“It is unreasonable and contrary to ordinary commercial sense that one party to a contract should be able to negate the bargain made by the other party by articulating nothing more than a bare claim that the insured has voided the contract.”
Since the grounds for the insurer to deny the Pinders’ claim represented a genuine issue for trial, the lower court was wrong to have ordered a summary judgment dismissal of the case, the Appeal Court ruled.