London and Midland Gen. Ins. v. Bonser, [1973] SCR 10

Supreme Court of Canada

London and Midland Gen. Ins. v. Bonser, [1973] S.C.R. 10

Date: 1972-05-01

London and Midland General Insurance Company, Zurich Insurance Company, Pilot Insurance Company, Home Insurance Company, Great Eastern Insurance Company, and Dominion Insurance Corporation (Defendants) Appellants;

and

Olive Tressa Bonser, Executrix of the Estate of Robert Alexander Bonser, Deceased (Plaintiff) Respondent.

1971: October 26, 27; 1972: May 1.

Present: Judson, Ritchie, Hall, Spence and Laskin JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Insurance—Fire insurance—Mortgage clause—Payment of premium financed through mortgagor’s agent—Mortgagor failing to make payment under premium contract—Agent serving notice of cancellation on insurers—Insurers not entitled to cancel policy without notice to mortgagee—The Insurance Act, R.S.O. 1960, c. 190, s. 110(1).

An hotel and its contents, owned by M and subject to a first mortgage in favour of B, were insured under a subscription policy placed with the appellant companies. The policy contained a mortgage clause stating that the loss, if any, under the policy was made payable to B, and stating in part that “this insurance, as to the interest of the Mortgagee only therein, shall not be invalidated by any act or neglect of the Mortgagor.” The payment of the premium was financed through C in accordance with a premium budget contract. The insurance companies received full payment of the premium from C and were supplied with a “Notice of Financed Premium”.

The terms of the budget premium contract required M to make payments monthly. He failed to make his November 1, 1967, payment to C and as a result C notified the companies with a “Notice of Cancellation”, the said notice being received by the companies prior to December 6, 1967. However, the companies did not advise the respondent executrix of the mortgagee’s estate of the cancellation prior to December 6, 1967. On that date the hotel and its contents were destroyed by fire.

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The respondent’s claim against the companies was allowed in full by the trial judge. An appeal was dismissed by the Court of Appeal and the companies then appealed to this Court. It was contended on their behalf that in conformity with the provision of statutory condition 5(b), the document headed “Notice of Cancellation” given to the insurer by the mortgagor’s agent C had the effect of terminating the policy without the necessity of giving any notice to the mortgagee.

Held: The appeal should be dismissed.

The statutory condition was to be read in the light of the provisions of s. 110(1) of The Insurance Act. The effect of s. 110 was to place the insurer under a duty not to cancel or alter the policy without due notice being given to the mortgagee, and although the “Notice of Cancellation” received from C would have brought the policy to an end if no third party had been involved, the insurer having consented to the loss being made payable to the mortgagee was required to give the mortgagee the statutory 15 days notice before cancelling the policy on the strength of the notification received from C.

In addition to the protection afforded to the mortgage by s. 110, the mortgage clause in the contract of insurance itself constituted recognition by all concerned of the inviolability to be attached to the mortgagee’s right to the continued protection of his interest in the land notwithstanding any act or neglect of the mortgagor. The mortgagor’s default in his payments to C constituted an act or neglect within the meaning of the mortgage clause but by reason of that clause it in no way invalidated the insurance in so far as the mortgagee was concerned.

Agricultural Loan Co. v. Liverpool Etc. Ins. Co. (1901), 3 O.L.R. 127; Hastings v. Westchester Fire Ins. Co. (1878), 73 N.Y. 141; London Loan and Savings Co. of Canada v. Union Insurance Co. of Canton Ltd. (1925), 56 O.L.R. 590 [affirmed 57 O.L.R. 651], referred to.

APPEAL from a judgment of the Court of Appeal for Ontario[1], dismissing an appeal from a judgment of Donohue J. Appeal dismissed.

A.E. Shepherd, Q.C., for the defendants, appellants.

J.E. Eberle, Q.C., for the plaintiff, respondent.

The judgment of the Court was delivered by

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RITCHIE J.—This is an appeal from a judgment of the Court of Appeal for Ontario dismissing an appeal from the judgment rendered at trial by Mr. Justice Donohue whereby he allowed in full the claim of the present respondent as mortgagee of the Royal Hotel in Hepworth, Ontario, which was owned by one Arnill Morris and insured by the appellants under a policy containing the mortgage clause to which reference will hereafter be made.

The case has been presented throughout on the basis of a statement of facts agreed to by the parties which reads as follows:

This action is a result of the following facts which have been agreed upon between the solicitors for the plaintiff and the defendants. The parties hereto have agreed that this is a matter of Law and the Facts are not in dispute.

One, Arnill Morris was to be insured under a policy which extended from July 1st, 1965 to July 1st, 1968 against fire and extended perils in respect of a building owned by him and known as The Royal Hotel in Hepworth, Ontario. The insurance coverage was under a subscription policy placed with the London & Midland General Insurance Company and the other defendants in accordance with the Composite Mercantile Policy annexed hereto as Exhibit “A”. The agents through which the insurance was placed were Messrs. Parke & Parke of Wiarton, Ontario. The building was insured for $40,000.00 and the fixtures and equipment (sic) for an additional $10,000.00. Loss under the policy is made payable to Robert Alexander Bonser the First Mortgagee in respect of Building and contents with a mortgage clause attached to the said policy.

The payment of the premium was financed through a company known as CAFO in accordance with the “Premium Budget Contract” annexed hereto as Exhibit “B”. The defendant companies received full payment of the premium from CAFO and were supplied with a “Notice of Financed Premium” in the form annexed hereto as Exhibit “C”.

Robert Alexander Bonser, the Mortgagee died on the 15th day of August, 1966 and Letters Probate were granted to the plaintiff, his widow, Olive Bonser on February 7, 1967. The mortgage security is still held in the estate and there is owing on the mortgage the sum of $41,000.00 as of the 1st July 1967 with interest thereon in the amount of 5% per annum.

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The terms of the budget premium contract required Arnill Morris to make payments monthly. The said Arnill Morris failed to make his November 1st, 1967 payment to CAFO and as a result CAFO notified the defendant companies with a “Notice of Cancellation” in accordance with the form annexed hereto as Exhibit “D”, the said notice being received by the companies and Messrs. Parke & Parke prior to the 6th of December, 1967. Neither the defendant companies nor Messrs. Parke & Parke of Wiarton, Ontario, advised the Executrix of the Mortgagee’s Estate of the cancellation prior to the 6th of December, 1967. On this date the Royal Hotel at Hepworth and the contents of the said hotel were destroyed by fire.

All of the above facts are admitted by both the plaintiff and the defendants’ solicitors on the basis that no witnesses shall be called at this trial.

The above facts respectfully submitted on behalf of the plaintiff’s solicitors, Craig & McKerroll, Barristers & Solicitors, 997 Second Avenue, East, Owen Sound, Ontario and on behalf of the defendants’ solicitors Shepherd, McKenzie, Plaxton, Little & Jenkins, Barristers & Solicitors, 200 Queens Avenue, London, Ontario.

The question as to whether under such circumstances, having regard to the terms of the policy, the insurer was entitled to cancel the policy on receipt of notice from the mortgagor’s agent and without notice to the mortgagee is the main matter in dispute between the parties.

The policy contains the following mortgage clause:

It is hereby provided and agreed that this insurance, as to the interest of the Mortgagees only therein, shall not be invalidated by any act or neglect of the Mortgagor or owner of the property insured, nor by the occupation of the premises for purposes more hazardous than are permitted by this Policy.

It is further provided and agreed that the Mortgagees shall at once notify said Insurer of non-occupation or vacancy for over thirty days, or of any change of ownership or increased hazard that shall come to their knowledge; and that every increase of hazard, not permitted by the Policy to the Mortgagor or owner, shall be paid for by the Mortgagees on reasonable demand from the date such hazard existed, according to the established scale of Rates

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for the use of such increased hazard during the continuance of this insurance.

It is also further provided and agreed that whenever the Insurer shall pay the Mortgagees any sum for loss under this Policy, and shall claim that, as to the Mortgagor or owner no liability therefor existed, it shall at once be legally subrogated to all rights of the Mortgagees under all the securities held as collateral to the Mortgage debt, to the extent of such payments, or, at its option, the Insurer may pay to the mortgagees the whole principal due or to grow due on the mortgage, with interest then accrued, and shall thereupon receive a full assignment and transfer of the Mortgage and all other securities held as collateral to the Mortgage debt, but no such subrogation shall impair the right of the Mortgagees to recover the full amount of their claim.

It is also further provided and agreed that in the event of the said property being further insured with this or any other Office, on behalf of the owner or Mortgagees, the Insurer, except such other insurance when made by the Mortgagor or owner shall prove invalid, shall only be liable for a rateable proportion of any loss or damage sustained.

At the request of the Insured, the loss, if any, under this Policy, is hereby made payable to Robert Alexander Bonser as his interest may appear, subject to the conditions of the above “Mortgage Clause.”

I think it is also pertinent at this stage to set out the provisions of s. 5 of the statutory conditions which reads as follows:

5. (1) The insurance may be terminated:

(a) subject to the statutory provision relating to cases where loss under the contract has, with the consent of the insurer, been made payable to some person other than the insured, by the insurer giving to the insured at any time fifteen days notice of cancellation by registered mail, or five days notice of cancellation personally delivered, and, if the insurance is on the cash plan, by refunding the excess of premium actually paid by the insured beyond the pro rata premium for the expired time;

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(b) if on the cash plan, by the insured giving written notice of termination to the insurer, in which case the insurer shall, upon surrender of this policy, refund the excess of premium actually paid by the insured beyond the customary short rate for the expired time.

(2) Repayment of the excess premium may be made by money, postal or express company money order, or by cheque payable at par.

(3) If the notice is given by registered letter the repayment shall accompany the notice.

(4) The fifteen days mentioned in clause a of subparagraph 1 of this condition commences to run from the day following the receipt of the registered letter at the post office to which it is addressed.

It is also relevant in determining the rights of the parties herein to give full effect to the provisions of s. 110 of The Insurance Act which reads:

110. (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.

(2) The length of and manner of giving the notice under subsection 1 is the same as notice of cancellation to the insured under the statutory conditions in the contract.

It is contended on behalf of the appellants that in conformity with the provisions of statutory condition 5(b), the document headed “Notice of Cancellation” given to the insurer by the mortgagor’s agent CAFO had the effect of terminating the policy without the necessity of giving any notice to the mortgagee.

The statutory condition must, however, be read in light of the provisions of s. 110(1) of The Insurance Act which precludes the insurer from cancelling or altering the policy to the prejudice of the mortgagee without 15 days notice of such cancellation or termination having been given to the mortgagee.

The answer to the question of whether the “Notice of Cancellation” served on the insurers by the mortgagor’s agent brought the contract to an

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end, or whether the insurers’ liability to the mortgagee remained outstanding unless and until a notice was served on the mortgagee in accordance with s. 110, is therefore the basic issue in this appeal. Like the trial judge and the Court of Appeal, I think that the effect of s. 110 of The Insurance Act is to place the insurer under a duty not to cancel or alter the policy without due notice being given to the mortgagee, and that although the “Notice of Cancellation” received from CAFO would have brought the policy to an end if no third party had been involved, the insurer having consented to the loss being made payable to the mortgagee was required to give the mortgagee the statutory 15 days notice before cancelling the policy on the strength of the notification received from CAFO. I adopt the concise statement contained in the penultimate paragraph of the reasons for judgment of Mr. Justice Schroeder where he said:

It was not open to the insurer…to give effect to CAFO’s Notice of Termination by cancelling the policy to the prejudice of the plaintiff mortgagee, nor to alter that policy by abridging the term of the protection which it afforded by acting upon that notice and cancelling the policy without notice to the mortgagee. That is a short but decisive answer to the submissions which have been…presented to us…

Mr. Justice Schroeder expressly refrained from offering any comment upon the view expressed by the learned trial judge that there was a separate and distinct contract between the mortgagee and the insurers, but I find it important that he found that it was not open to the insurer to alter the policy “by abridging the term of the protection which it afforded.”

The first paragraph of the mortgage clause in this policy can, in my view, only be construed as a part of the “protection which it afforded” to the mortgagee and it appears to me that when the insurers cancelled the policy pursuant to the notice given by CAFO, acting as the agent of the mortgagor, and without notice to the mortgagee, they were abridging the term of the policy in contravention of the provisions of the mortgage clause by which it is expressly agreed that the

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interest of the mortgagee “shall not be invalidated by any act or neglect of the mortgagor…”

While I agree with the reasons and conclusions of Mr. Justice Schroeder, I think that they are reinforced by the fact that in addition to the protection afforded to the mortgagee by s. 110, the mortgage clause in the contract of insurance itself constitutes recognition by all concerned of the inviolability to be attached to the mortgagee’s right to the continued protection of his interest in the land notwithstanding any act or neglect of the mortgagor.

The first paragraph of the mortgage clause reads in part as follows:

It is hereby provided and agreed that this insurance, as to the interest of the Mortgagees only therein, shall not be invalidated by any act or neglect of the Mortgagor or owner of the property insured.

In the present case the full three-year premium had been paid to the insurer by CAFO, but the insurers had been given notice of the situation and knew that CAFO had the right to cancel the policy if the mortgagor failed to make payments in accordance with the “premium budget contract” under which the premium was being financed by CAFO. It appears to me therefore that the mortgagor’s default in his payments to CAFO constituted an act or neglect within the meaning of the mortgage clause but that by reason of that clause it in no way invalidated the insurance in so far as the mortgagee was concerned. In such case the mortgagee remains fully protected until notice is given under s. 110.

As the learned trial judge has indicated, the protection afforded to the mortgagee by the mortgage clause has been recognized throughout the United States of America and in some jurisdictions in Canada as amounting to a separate contract between the owners and the mortgagee. This proposition was succinctly stated by Osler J.A. in reference to the case of Agricultural Savings and Loan Company v. Liverpool and

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London and Globe Insurance Company,[2] where he said at p. 141:

…the policy of insurance contained what is known as the subrogation or mortgage clause—which is a contract by the company directly with the mortgagees, and in terms expressly renounces the right of the company to set up, as a defence against the mortgagees, any act or neglect on the part of the mortgagor.

In making this statement, Mr. Justice Osler adopted the reasoning of Miller J., in Hastings v. Westchester Fire Ins, Co,[3] where it was said, at p. 147, that:

The legal effect of the mortgage clause was, that the defendant agreed that in case of loss it would pay the money directly to the mortgagees; and they were thus recognized as a distinct party in interest. It created a new contract from that time with the mortgagees…

The position in the courts of the United States is well summarized in Couch on Insurance, 2nd ed., vol. 11, p. 348, para. 42:694:

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.

It is noteworthy that while the decision of Osler J.A. in the Agricultural Savings and Loan Company case, supra, appears to adopt this approach, Mr. Justice Davies in the course of the reasons for judgment which he rendered on behalf of the majority of this Court on the appeal in that case, (33 S.C.R. 94 at p. 110) expressly

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declined to rest his judgment on this ground saying:

I have already stated that it is not necessary on this appeal for us to determine, and we do not determine, whether such a mortgage clause as was inserted in this policy gave the mortgagees such a beneficial right and interest or constituted such a direct contract between the mortgagees and the insurance company as would enable the former to sue in their own name…

The independent contract approach was, however, reasserted in the Trial Division of the Supreme Court of Ontario in London Loan and Savings Co. of Canada v. Union Insurance Co. of Canton Ltd.,[4] at p. 593. In that case the mortgage clause was practically identical with the one here under consideration and Mr. Justice Logie said:

There is a singular dearth of Ontario cases on the point. The only cases which I have been able to find are Agricultural Savings and Loan Co. v. Liverpool and London and Globe Insurance Co. (1901), 3 O.L.R. 127, and the cases therein mentioned. That decision was reversed by the Supreme Court of Canada on another point: Liverpool and London Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 Can. S.C.R. 94. In that case there was a mortgage-clause in the same words as in this case, and the position of the mortgagees, to whom by a policy the loss was made payable “as their interests may appear,” and the effect of the mortgage-clause, are discussed. Osler, J.A., adopting the reasoning of Miller, J., in Hastings v. Westchester Fire Insurance Co. (1878), 73 N.Y. 141, held that the subrogation or mortgage clause was a contract by the company directly with the mortgagees.

The effect of such a mortgage-clause is to bring the insurer and the mortgagee into privity, to convert the mortgagee into a party to the contract of insurance, to give to the mortgagee separate and distinct protection as to his interest, to create in him an interest in the policy distinct from that of the property-owner, and in fact to make him an insured: Dawson v. Dawson (1911), 23 O.L.R. 1, at p. 18; Haslem v. Equity Fire Insurance Co. (1904), 8

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O.L.R. 246, at p. 248: Laidlaw v. Hartford (1915), 24 D.L.R. 884; Liverpool and London and Globe Insurance Co. v. Kadlac (1918), 41 D.L.R. 700, at p. 701; Joyce on Insurance, 2nd ed., vol. 4, sec. 2795b.

In the course of the reasons for judgment which he delivered on behalf of the Appellate Division of the Ontario Supreme Court in that case, Middleton J.A., expressly approved what had been said by Mr. Justice Logie and used the following language with reference to all defences which had been raised:

All these defences are, in my view, quite satisfactorily dealt with by the trial Judge, and little need be said beyond what is found in his very careful judgment. Before us the question mainly pressed was the contention that there was no right in the plaintiffs to maintain an action in their own name upon the policy. This question is, I think, concluded so far as we are concerned, by the judgment of the Court of Appeal in the case of Agricultural S. & L. Co. v. Liverpool & London & Globe Ins. Co. 3 O.L.R. 127.

The Ontario cases to which I have referred appear to have been decided before the predecessor of s. 110 was first enacted as statutory condition 9 in the Ontario Insurance Act of 1924, and I have cited them and made reference to the American authorities in order to underline the fact that the importance of protecting the interest of the mortgagee in such cases has long been recognized in jurisdictions where no provision equivalent to s. 110 exists.

As I have said, I adopt the reasons and conclusions of Mr. Justice Schroeder and would therefore dismiss this appeal with costs.

Appeal dismissed with costs.

Solicitors for the defendants, appellants: Shepherd, McKenzie, Plaxton, Little and Jenkins, London.

Solicitors for the plaintiff, respondent: Goodman & Goodman, Toronto.