National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029
Antonio Panzera, Giuseppe Valiante,
Francesco Tatta and Andrea Barbiero Appellants
v.
Simcoe & Erie Insurance Company, General
Accident Insurance and Balboa Insurance Company Respondents
indexed as: national bank of greece (canada) v. katsikonouris
File No.: 21341.
1990: March 20; 1990: October 4.
Present: La Forest, L'Heureux‑Dubé, Gonthier, Cory and McLachlin JJ.
on appeal from the court of appeal for quebec
Insurance -- Fire insurance -- Nature and effect of hypothecary (mortgage) clause -- Misrepresentations by hypothecary debtor when insurance policy purchased -- Whether nullity ab initio of insurance policy can be invoked against hypothecary creditors.
A businessman obtained a loan from appellants and hypothecated one of his properties to secure its repayment. The hypothecary deed of loan provided that the debtor undertook to insure the hypothecated property in favour of appellants and in fulfilment of this obligation the debtor later purchased a fire insurance policy from respondent insurers. This policy contained a standard mortgage clause (or standard hypothecary clause) which provided that "this insurance . . . is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk". The debtor's property was destroyed by fire and the insurers refused to pay appellants the indemnity, alleging that the policy was void ab initio as the result of misrepresentations by the debtor when the policy was purchased. The latter allegedly did not disclose the occurrence of criminal fires on the insured premises and the refusal by the previous insurer to continue insuring the property. Relying on the mortgage clause, appellants then brought an action against the insurers for payment of the indemnity. The Superior Court allowed the action but the Court of Appeal reversed this judgment. This appeal is to determine whether the nullity ab initio of the insurance policy, resulting from misrepresentations by the hypothecary debtor at the time the policy was purchased, can be invoked against the hypothecary creditors.
Held (L'Heureux‑Dubé and Gonthier JJ. dissenting): The appeal should be allowed.
Per La Forest, Cory and McLachlin JJ.: When insuring its own interest in the property, the hypothecary debtor also assumed a mandate to take out a separate and distinct contract of insurance to insure the hypothecary creditors' interest in the hypothecated property. The insurers cannot refuse to honour this independent contract (the standard mortgage clause) with the hypothecary creditors on discovering that their contract with the hypothecary debtor was issued on the basis of misrepresentations or omissions such that it was null ab initio. The standard mortgage clause makes no distinction between acts and neglects of the hypothecary debtor committed at the inception of the policy, and acts and neglects subsequent to its formation. The clause is written in clear and untechnical language and simply states that the insurance of the hypothecary creditors will not be invalidated by any omission or misrepresentation of the hypothecary debtor. In the face of this unequivocal representation, the courts should not import interpretive subtleties where none exist. Where the contract is unambiguous, and its meaning clear, there is no occasion for construction. The insurance of the hypothecary creditors cannot, therefore, be invalidated by any act or neglect of the hypothecary debtor, be it at the inception of the policy, or subsequent to its formation. The validity of this independent contract depends solely on the course of action between the hypothecary creditors and the insurers. To hold otherwise would distort the plain and ordinary language used in the clause.
The ejusdem generis rule finds no application in the context of the standard mortgage clause. The precondition for application of the rule is not met, for in the clause under consideration the general words precede and do not follow the specific enumeration. The rationale for applying the rule is accordingly absent. Further, while the specific examples of omissions and misrepresentations found in the policy all relate to faults which the hypothecary debtor is in a position to commit only subsequent to the formation of a valid contract, these terms are found in a clause in which the insurer is enumerating faults of the hypothecary debtor which the insurer represents that it will not rely on in order to deny coverage to the hypothecary creditor. Far from intending to represent to the hypothecary creditor that only omissions and misrepresentations committed by the hypothecary debtor after the conclusion of a valid contract will not invalidate coverage, the insurer makes it clear that even omissions and misrepresentations of this nature will not invalidate the hypothecary creditor's coverage.
Additionally, insurance contracts must be interpreted as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law. If the insurer were reserving to itself the right to invalidate the coverage of the hypothecary creditor as a result of some misrepresentations and omissions of the hypothecary debtor, it was incumbent on the insurer, in drafting its insurance form, to make this known in clear, express and easily intelligible terms.
Finally, while the hypothecary debtor is acting as the mandatary of the hypothecary creditor when it insures the hypothecary creditor's interest, it does not follow that any false representations made by the hypothecary debtor in effecting its mandate should be held to be those of the hypothecary creditor. The law of mandate does not operate so as to have this effect in the context of the standard mortgage clause. This inference would run counter to what must be taken to be the understanding of the parties. When a hypothecary creditor elects to insure through the medium of the standard mortgage clause, it does so on the reasonable expectation that its interest will be protected in the same way as if it had entered into an independent contract evidenced by a separate piece of paper, and nothing in the wording of the clause supports the conclusion that the insurer is proceeding on any other understanding. To make the insurance of the hypothecary creditor dependent to a certain degree on the course of dealings between the hypothecary debtor and the insurer would strike at the very raison d'être of the standard mortgage clause.
Per L'Heureux‑Dubé and Gonthier JJ. (dissenting): The insurance clause in the hypothecary loan contract is a contract of mandate, by which the hypothecary debtor undertakes to insure the hypothecated property on behalf of his hypothecary creditor. In accordance with that mandate, the hypothecary debtor purchased an insurance policy containing a standard mortgage clause. That policy thus sets out two separate insurance contracts, one between the hypothecary debtor and the insurers, and the other between the hypothecary creditors and the insurers. However, the hypothecary debtor's insurance contract is void ab initio because of the latter's misrepresentations when the policy was purchased. Since the debtor was acting in accordance with his mandate by purchasing the hypothecary creditors' insurance contract, the misrepresentations he made at that time must be regarded, for the purposes of considering the validity of this contract, as misrepresentations made by the hypothecary creditors themselves. These misrepresentations have, as to the insurance contract between the hypothecary creditors and the insurers, consequences similar to those produced on the hypothecary debtor's personal insurance contract. They have the effect of misrepresenting the risk to the insurers and thereby of vitiating their consent to the insurance contract purchased for the hypothecary creditors, in the same way as these misrepresentations vitiated the insurers' consent to the hypothecary debtor's insurance contract. The insurance contract between the insurers and the hypothecary creditors is thus also void ab initio.
Analysis of the language of the mortgage clause and its context indicate that the nullity ab initio of the insurance contract as a consequence of misrepresentation by the hypothecary debtor when the contract is purchased can be invoked against the hypothecary creditors. The examples given in the clause are not exhaustive but clearly indicate the type of act the parties intended to include in the expression "act, neglect, omission or misrepresentation". All these examples are a homogeneous group having as their common feature occurrence after the purchase of the policy. By application of the rule of interpretation noscitur a sociis or the ejusdem generis rule, we must therefore conclude that only misrepresentations subsequent to purchase are covered by the mortgage clause. Further, the insurance contract, like any other contract, rests on the presumed good faith of the parties. If the parties wished to cover the risk concerned here, they should have done so in clear and express language, which is not the case in the mortgage clause at issue here.
Cases Cited
By La Forest J.
Followed: Hastings v. Westchester Fire Insurance Co., 73 N.Y. 141 (1878); Syndicate Ins. Co. v. Bohn, 65 F. 165 (1894); Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 000; not followed: Imperial Building & Loan Ass'n v. Aetna Ins. Co., 166 S.E. 841 (1932); Hanover Fire Ins. Co. v. National Exchange Bank, 34 S.W. 333 (1896); Omnium Securities Co. v. Canada Fire and Mutual Insurance Co. (1882), 1 O.R. 494; Chenier v. Madill (1973), 2 O.R. (2d) 361; distinguished: Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94; referred to: London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10; Madill v. Lirette, [1987] R.J.Q. 993; Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser & Co. (1887), 12 App. Cas. 484; Renault v. Bell Asbestos Mines Ltd., [1980] C.A. 370; Scott v. Wawanesa Mutual Insurance Co., [1989] 1 S.C.R. 1445; Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888.
By L'Heureux‑Dubé J. (dissenting)
Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 000, aff'g [1988] R.J.Q. 2355 (C.A.); Madill v. Lirette, [1987] R.J.Q. 993 (C.A.), rev'g [1982] C.S. 49 (sub nom. Great American Insurance Co. v. Lirette); Hastings v. Westchester Fire Insurance Co., 73 N.Y. 141 (1878); Syndicate Ins. Co. v. Bohn, 65 F. 165 (1894); Reed v. Firemen's Insurance Co. of Newark, 35 L.R.A. (N.S.) 343 (1911); Federal Land Bank of Columbia v. Atlas Assur. Co., 125 S.E. 631 (1924); Collins v. Michigan Commercial Underwriters, 6 Tenn. App. 528 (1928); Fayetteville Building & Loan Ass'n v. Mutual Fire Ins. Co. of West Virginia, 141 S.E. 634 (1928); National Union Fire Ins. Co. v. Short, 32 F.2d 631 (1929); Stockton v. Atlantic Fire Ins. Co., 175 S.E. 695 (1934); National Fire Ins. Co. of Hartford, Conn. v. Dallas Joint Stock Land Bank of Dallas, 50 P.2d 326 (1935); Western Assur. Co. v. Hughes, 66 P.2d 1056 (1937); Great American Insurance Co. of New York v. Southwestern Finance Co., 297 P.2d 403 (1956); Northwestern National Insurance Co. v. Mildenberger, 359 S.W.2d 380 (1962); Equality Savings and Loan Association v. Missouri Property Insurance Placement Facility, 537 S.W.2d 440 (1976); Meade v. North Country Co‑Operative Insurance Co., 487 N.Y.S.2d 983 (1985); Hanover Fire Ins. Co. v. National Exchange Bank, 34 S.W. 333 (1896); Graham v. Fireman's Insurance Co., 87 N.Y. 69 (1881); Young Men's Lyceum of Tarrytown v. National Ben Franklin Fire Ins. Co. of Pittsburg, 163 N.Y.S. 226 (1917); Imperial Building & Loan Ass'n v. Aetna Ins. Co., 166 S.E. 841 (1932); Omnium Securities Co. v. Canada Fire and Mutual Insurance Co. (1882), 1 O.R. 494; Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94; Chenier v. Madill (1973), 2 O.R. (2d) 361; Canadian Imperial Bank of Commerce v. Dominion of Canada General Insurance Co. (1987), 29 C.C.L.I. 313; Renault v. Bell Asbestos Mines Ltd., [1980] C.A. 370; Duchesneau v. Great American Insurance Co., [1955] Que. Q.B. 120; Amin v. Cie d'assurance American Home, [1989] R.R.A. 151; Veilleux v. Victoria Insurance Co., [1989] R.J.Q. 1075.
Statutes and Regulations Cited
Civil Code of Lower Canada [am. 1974, c. 70, s. 2], arts. 1024, 1727, 2485 [am. 1979, c. 33, s. 44], 2486 [am. idem, s. 45], 2487, 2499, 2510 to 2515, 2566 [am. idem, s. 48], 2572, 2573.
Authors Cited
American Jurisprudence, vol. 43, 2nd ed. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1982.
Bergeron, Jean‑Guy. "L'opposabilité des exceptions à différents intéressés dans un contrat d'assurance" (1987), 47 R. du B. 933.
Bouzat, Pierre. "De la clause par laquelle une partie dans une convention s'engage à ne pas en demander la nullité" (1934), 54 Rev. crit. lég. et jur. 350.
Concise Oxford Dictionary, 7th ed. By J. B. Sykes. Oxford: Clarendon Press, 1982, "include".
Côté, Pierre‑André. The Interpretation of Legislation in Canada. Cowansville: Yvon Blais Inc., 1984.
Couch, George J. Cyclopedia of Insurance Law, vol. 10A, 2nd ed. By Ronald A. Anderson. Revised volume by Mark S. Rhodes. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1982.
Domenget, M. Du mandat, de la commission et de la gestion d'affaires, t. 1. Paris: Cotillon, 1862.
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Dwyer, James R. and Carey S. Barney. "Analysis of Standard Mortgage Clause and Selected Provisions of the New York Standard Fire Policy" (1984), 19 Forum 639.
Encyclopédie juridique Dalloz: Répertoire de droit civil, t. 5, 2e éd. "Mandat", par René Rodière.
Faribault, Bernard. "Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300.
Petit Robert 1. Par Paul Robert. Paris: Le Robert, 1987, "notamment".
Picard, Maurice et André Besson. Traité général des assurances terrestres en droit français, t. 2. Paris: L.G.D.J., 1940.
Simard Jr., François‑Xavier. "La faute intentionnelle de l'assuré et la clause de garantie hypothécaire" (1987), 21 R.J.T. 335.
Stroud's Judicial Dictionary, vol. 3, 5th ed. By John S. James. London: Sweet & Maxwell, 1986, "include", "including".
APPEAL from a judgment of the Quebec Court of Appeal, [1989] R.D.I. 46, [1989] R.R.A. 145, 20 Q.A.C. 226, 36 C.C.L.I. 296, reversing a judgment of the Superior Court, [1985] C.S. 1263, 16 C.C.L.I. 126. Appeal allowed, L'Heureux‑Dubé and Gonthier JJ. dissenting.
Jacques Fournier, for the appellants.
Émile Colas, Q.C., for the respondents.
//La Forest J.//
The judgment of La Forest, Cory and McLachlin JJ. was delivered by
LA FOREST J. -- I have had the advantage of reading the reasons of my colleague, Justice L'Heureux‑Dubé. She has fully set forth the facts and judicial history of the case, and I need not repeat them. However, I am unable, with respect, to agree with her conclusions for the reasons that follow.
In its decision in Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 000 (hereinafter Caisse populaire), issued concurrently, this Court elaborated an explanation for the operation of the standard mortgage clause in light of civil law principles. For ease of reference, I set out the French and English versions of the clause as it appears in the policy issued by the respondent insurers:
IT IS HEREBY PROVIDED AND AGREED THAT:
1.This insurance and every documented renewal thereof -‑ AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN -‑ is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk.
VIOLATIONS DU CONTRAT
Ne sont pas opposables aux créanciers hypothécaires les actes, négligences ou déclarations des propriétaires, locataires ou occupants des biens assurés, notamment en ce qui concerne les transferts d'intérêts, la vacance ou l'inoccupation, ou l'affectation des lieux à des fins plus dangereuses que celles déclarées.
The clause, which with variations is used throughout North America, was obviously intended to have the same effect in both common law and civil law jurisdictions and reference will be made to cases arising under both judicial systems. To avoid terminological confusion, I have, consistently with the clause itself, used the word "mortgage" and related expressions in the English version of these reasons to include "hypothec" and related concepts.
In Caisse populaire, the Court held that the hypothecary debtor (or the mortgagor), when insuring its own interest in the property, also assumes a mandate to take out a separate and distinct contract of insurance to insure the hypothecary creditor's (or the mortgagee's) interest in the mortgaged property. This appeal now raises the important question whether the insurer can refuse to honour this independent contract with the hypothecary creditor or mortgagee on discovering that its contract with the hypothecary debtor or mortgagor was issued on the basis of misrepresentations or omissions such that it was null ab initio. Unlike my colleague, I am of the view that both the nature and the language of the standard mortgage clause, as well as compelling considerations of history and policy, militate against this conclusion.
The Nature and Interpretation of the Mortgage Clause
In her reasons in Caisse populaire, at p. 000, L'Heureux‑Dubé J. has drawn attention to the fact that the civil law explanation for the operation of the standard mortgage clause harmonizes with the interpretation that has emerged in the common law jurisprudence. My colleague has pointed out that the standard mortgage clause was first used in the United States. A review of the American authorities reveals an all but universal consensus to the effect that this clause evidences an independent contract between the insurer and the mortgagee. My colleague has also noted that the "two contract" theory is now well anchored in Canadian jurisprudence. Notably, in London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10, a common law decision, this Court expressed approval of the two contract theory, and several recent lower court decisions have also adopted this approach to the operation of the standard mortgage clause; see Caisse populaire, at p. 000.
It should also be noted that the American jurisprudence dealing with the narrow issue raised by this appeal is all but unanimous in concluding that by virtue of the two contract theory, the insurance of the mortgagee cannot be invalidated by any act or neglect of the mortgagor, be it at the inception of the policy, or subsequent to its formation; see Couch, Couch on Insurance (2nd ed. 1982), vol. 10A, {SS} 42:736. Thus the overwhelming majority of the decisions are in essential agreement with an interpretation of the clause that would seem to have first emerged in the decision of the New York Court of Appeal in Hastings v. Westchester Fire Insurance Co., 73 N.Y. 141 (1878). There Rapallo J. stated the following, at p. 153:
To hold otherwise would, I think, defeat the purpose intended, and deprive the mortgagees of the protection upon which they had a right to rely. Although the clause might be construed so as to exempt the mortgagees from the consequences only of acts of the owners done after the making of the agreement, I do not think, in view of its apparent purpose, that any such distinction was intended.
I note that my colleague who cites a plethora of decisions that have followed the lead taken in Hastings can point to no decision since Imperial Building & Loan Ass'n v. Aetna Ins. Co., 166 S.E. 841 (W. Va. 1932), rejecting that approach.
As I view the matter, the contrary interpretation, which is to the effect that the clause only protects the mortgagee or hypothecary creditor from faults of the mortgagor or hypothecary debtor after the inception of a valid contract between the mortgagor and the insurer distorts the plain and ordinary language used in the standard clause.
In Syndicate Ins. Co. v. Bohn, 65 F. 165 (1894), the Eighth Circuit of the United States Court of Appeal was called on to interpret a standard mortgage clause that read "this insurance, as to the interests of the . . . mortgagee . . . only, shall not be invalidated by any act or neglect of the mortgagor or owner of the property insured", a text which is essentially of the same character as that in issue here. I find myself in full agreement with the analysis of Sanborn Cir. J. who concluded, at pp. 176‑77:
Was it that contract that the indemnity of the mortgagee should not be protected against any prior act or negligence of the mortgagors? There is no such restriction in the contract. It provides that the mortgagee's interest shall not be invalidated by any act or neglect of the mortgagors, by any occupancy or vacancy, or by any change of title or possession of the premises, provided that the mortgagee shall notify the insurance company of any change of ownership or increase of hazard that may come to its knowledge, shall have permission therefor indorsed on the policy, and shall pay for it. . . . What apter terms could be chosen to effect a separate insurance on the interest of the mortgagee, to free that insurance from any possible influence of any act or neglect of the mortgagors, and to make it dependent solely on the course of action of the mortgagee and the insurance company? None occur to us. [Emphasis added.]
These comments remind one that it is important in interpreting a contract of insurance to give words their ordinary meanings. In the version of the standard mortgage clause under consideration here, no distinction is made between the "act", "neglect", "omission" or "misrepresentation" that a mortgagor might commit. The clause merely states, in simple and untechnical language, that the insurance, as to the interest of the mortgagee, is and shall be in force notwithstanding any act, neglect, omission or misrepresentation committed by the mortgagor. Given this unequivocal representation, it is unclear to me on what grounds one may seek to limit the application of the word "any", which, of course, is commonly understood as meaning "no matter which". I respectfully share the conclusion of the trial judge, Lamb J., who stated:
The express renunciation of the insurers must therefore be read as intending to refer to absolute as well as relative nullity, in the absence of any words imposing a restrictive distinction between the two.
([1985] C.S. 1263, at p. 1269.)
The Court of Appeal, [1989] R.D.I. 46, relying in great part on its earlier decision in Madill v. Lirette, [1987] R.J.Q. 993, downplayed the fact that the clause does not expressly distinguish between the "act", "neglect", "omission" or "misrepresentation". It accorded great importance to the fact that the omissions and misrepresentations specifically mentioned in the clause all relate to acts which the mortgagor is only in a position to commit following the inception of a valid contract. As put by Desmeules J. (ad hoc), at p. 50:
[TRANSLATION] The wording of the present hypothecary (mortgage) clause, in effect since 1972, refers to certain situations such as transfers of interest, vacancy or non‑occupancy or the occupation of the property for purposes more hazardous than those specified, and it subjects creditors to an obligation to inform the insurer as soon as they are aware of such situations.
These events are subsequent to the issuing of the insurance policy, and this leads me to conclude that it is such situations that the insurers sought to provide for in their hypothecary (mortgage) clause.
In his concurring judgment, Beauregard J.A. added, at p. 47:
[TRANSLATION] Despite the use of the adverb "including", by application of the "rule" of interpretation noscitur a sociis or the ejusdem generis rule, we must conclude that "any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured" is an "act, neglect, omission or misrepresentation" which took place or was made after the policy was issued, just as "transfer of interest, vacancy or non‑occupancy or the occupation of the property for purposes more hazardous than those specified".
I am unable to agree with the Court of Appeal's view that it is clear, by application of the ejusdem generis rule, that the reference in the clause to "omission[s] or misrepresentation[s]" is to be taken as limited to omissions and misrepresentations subsequent to the inception of the policy. I am of the view that this rule of construction finds no application in the context of the standard mortgage clause.
At page 111 of his book Construction of Statutes (2nd ed. 1983), Professor Driedger points to the definition of the rule given by Lord Halsbury L.C. in Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser & Co. (1887), 12 App. Cas. 484, at p. 490. Lord Halsbury L.C. observes that the rule is predicated on the notion that "general words may be restricted to the same genus as the specific words that precede them". I would also cite from an illustration of the working of the rule provided by Professor Côté in The Interpretation of Legislation in Canada (1984), at p. 243. Professor Côté quotes from the observations of Turgeon J.A. in Renault v. Bell Asbestos Mines Ltd., [1980] C.A. 370, at p. 372. The remarks are to the same effect as those of Lord Halsbury L.C., though I would draw attention to Turgeon J.A.'s important observation:
[TRANSLATION] In other words, for the rule to apply it is absolutely necessary that there be a class or category preceding the general terms, if the intent is to limit them to that class or category. [Emphasis added.]
Here, of course, this precondition for application of the rule is not met, for in the clause under consideration the general words precede and do not follow the specific enumeration. The clause states that coverage as to the interest of the mortgagee is valid notwithstanding "omission[s] or misrepresentation[s]", and then provides illustrative examples of such omissions and misrepresentations. The rationale for applying the ejusdem generis rule is accordingly absent. Whatever the particular document one is construing, when one finds a clause that sets out a list of specific words followed by a general term, it will normally be appropriate to limit the general term to the genus of the narrow enumeration that precedes it. But it would be illogical to proceed in the same manner when a general term precedes an enumeration of specific examples. In this situation, it is logical to infer that the purpose of providing specific examples from within a broad general category is to remove any ambiguity as to whether those examples are in fact included in the category. It would defeat the intention of the person drafting the document if one were to view the specific illustrations as an exhaustive definition of the larger category of which they form a part.
Moreover, in this instance, the very language used to introduce the list of omissions and misrepresentations confirms that it would be erroneous to view them as exhaustive. In the English version of the clause, the term "including" precedes the list of examples of omissions and misrepresentations, while the term "notamment" is used in the French text. I note that the Concise Oxford Dictionary (7th ed. 1982) defines "include" as "comprise or embrace (thing etc.) as part of a whole", while the Petit Robert 1 (1987) says of "notamment" that it "sert le plus souvent à attirer l'attention sur un ou plusieurs objets particuliers faisant partie d'un ensemble précédemment désigné ou sous‑entendu". This meaning finds confirmation in legal lexicons as well: the entries under "include" and "including" in Stroud's Judicial Dictionary (5th ed. 1986) to take but one example, again make it clear that these words are terms of extension, designed to enlarge the meaning of preceding words, and, not, to limit them.
As I have noted, the natural inference is that the drafter will provide a specific illustration of a subset of a given category of things in order to make it clear that that category extends to things that might otherwise be expected to fall outside it. As I see it, it is precisely this reasoning which explains the reference to specific omissions and misrepresentations in the standard mortgage clause. The Court of Appeal was correct in pointing out that the specific examples of omissions and misrepresentations found in the policy all relate to faults which the mortgagor is in a position to commit only subsequent to the formation of a valid contract. It is important to bear in mind, however, that these terms are found in a clause in which the insurer is enumerating faults of the mortgagor which the insurer represents that it will not rely on in order to deny coverage to the mortgagee. When due account is taken of this fact, it becomes apparent that the insurer, far from intending to represent to the mortgagee that only omissions and misrepresentations committed by the mortgagor after the conclusion of a valid contract will not invalidate coverage, is, instead, at pains to make it clear that even omissions and misrepresentations of this nature will not invalidate the mortgagee's coverage. For from the perspective of the insurer by far the greater risk is posed precisely by omissions and misrepresentations the mortgagor may commit after a validly formed contract is entered into. In his article "L'opposabilité des exceptions à différents intéressés dans un contrat d'assurance" (1987), 47 R. du B. 933, Professor Bergeron puts the matter convincingly when he argues, at p. 988:
[TRANSLATION] When one reflects carefully about it, one realizes that there is in this list one exception, the transfer of interest, which is of much greater concern to the insurer than nullity for misrepresentation. In the first case the assignee is a new insured, unknown to the insurer, about whom he has been unable to make any inquiries in order to determine the risk. It is thus all the more reasonable that misrepresentations by an insured from whom the insurer has had an opportunity of obtaining all relevant information cannot be pleaded. [Emphasis in original.]
The same could, of course, be said with respect to the occupation of the property for purposes more hazardous than specified in the description of the risk. If the mortgagor concludes a valid contract and then, unbeknownst to the insurer, transforms the property into a depository for flammable liquids, an omission to convey this change in the vocation of the property may be infinitely more prejudicial to the insurer than a simple misrepresentation at the time of concluding the contract.
In the result, considerations of a practical commercial nature militate strongly against the interpretation advanced by the Court of Appeal. It defies rational explanation to suppose that the insurer would agree not to invalidate coverage of the mortgagee with respect to the very omissions and misrepresentations of the mortgagor that stand to affect most radically the risk it has agreed to assume, while at the same time reserving to itself the right to invalidate coverage in respect of the omissions and misrepresentations it had a reasonable opportunity to investigate before agreeing to issue a policy.
I respectfully conclude therefore that the Court of Appeal has misconstrued the reference to specific omissions and misrepresentations in the standard mortgage clause. The interpretation of the Court of Appeal ignores commercial practicalities, and gives a strained and unnatural meaning to the language used.
Additionally, I am of the view that to adopt the interpretation of the Court of Appeal would be to ignore the well‑recognized principle that it is necessary to interpret insurance contracts as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law. I have elaborated (in dissent) on this principle in Scott v. Wawanesa Mutual Insurance Co., [1989] 1 S.C.R. 1445, at pp. 1454‑55. Here, in the absence of clear and explicit language pointing to a different meaning in the policy itself, I am at a loss to see how mortgagee purchasers of fire insurance, on reading that their coverage will not be denied for "any" misrepresentations or omissions of their mortgagor, could be expected to do other than take this statement at face value. If, in fact, the insurer were reserving to itself the right to invalidate the coverage of the mortgagee as a result of some misrepresentations and omissions of the mortgagor (i.e., those made at the inception of the contract between the insurer and the mortgagor), I would hold that it was incumbent on the insurer, in drafting its insurance form, to make this known in clear, express and easily intelligible terms. It can hardly be expected that a mortgagee deduce, on the basis of the type of subtle analysis engaged in by the Court of Appeal, that the insurer, despite expressly saying that coverage will not be denied for "any" omissions and misrepresentations of the mortgagor, has, in fact, meant to say that coverage will not be denied for "some" omissions and misrepresentations.
In short, there is little mystery to me why the overwhelming majority of the American decisions reject the notion that the standard mortgage clause makes a distinction between acts and neglects of the mortgagor committed at the inception of the policy, and acts and neglects subsequent to its formation. The standard mortgage clause is written in clear and untechnical language and simply states that the insurance of the mortgagee will not be invalidated because of anything the mortgagor might do. As I see it, in the face of this unequivocal representation, the courts have shied from importing interpretive subtleties where none exist. In a word, the American courts have applied the principle that where the contract is unambiguous, and its meaning clear, there is no occasion for construction; see 43 Am. Jur. 2d Insurance {SS} 271 (1982).
It is true that the clause under consideration here differs somewhat from that which was the object of consideration in the American decisions. But when one looks to the substance of the differences, I conclude that they, if anything, only reinforce the case for adopting the interpretation of the standard mortgage clause advanced in the overwhelming majority of the American decisions.
For ease of comparison, I set out first the relevant portion of the American clause:
. . . and this insurance shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property . . .
and, once again, its counterpart in use in Canada:
IT IS HEREBY PROVIDED AND AGREED THAT:
1.This insurance and every documented renewal thereof ‑- AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN -‑ is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk.
VIOLATIONS DU CONTRAT
Ne sont pas opposables aux créanciers hypothécaires les actes, négligences ou déclarations des propriétaires, locataires ou occupants des biens assurés, notamment en ce qui concerne les transferts d'intérêts, la vacance ou l'inoccupation, ou l'affectation des lieux à des fins plus dangereuses que celles déclarées.
It is clear that the substance of the difference between the Canadian and American versions of the clause lies in the fact that the text used in Canada incorporates a distinct and pointed reference to "omission" and "misrepresentation" of the mortgagor, over and above the mention of "act" and "neglect".
I have already drawn attention to the fact that there is today all but unanimous agreement in the American decisions that a mortgagee insuring its interest through the medium of the standard mortgage clause will not be denied coverage because of anything that its mortgagor may do, be it at the inception of the contract or subsequent to its formation. It is clear, therefore, that the American courts have proceeded on the basis that the terms "act" and "neglect" in the clause include breaches of warranty or fraudulent concealments mortgagors may commit on taking out their policy. I am firmly of the view that that particular interpretation is sound given the wide sweep of the words used in the clause. It is difficult to understand on what basis one could argue that an omission or misrepresentation is not included within the meaning of the open‑ended terms "act" and "neglect". But whatever view one might hold on the matter, the effect of the additions in the clause in question here make the issue moot, for in that clause the insurer has expressly undertaken not to refuse coverage on the basis of any omission or misrepresentation of the mortgagor. In effect, the additions in the Canadian version of the clause make all the more compelling the case for following the lead of the American courts and concluding that by virtue of the standard mortgage clause the insurer is representing to the mortgagee that the contract between them is meant to be unaffected by anything the mortgagor might do before or after the inception of the policies. It would be paradoxical indeed if one were to compare the Canadian and American versions of the clause and then conclude that, here, the insurer is in fact cutting down on the scope of the protection afforded the mortgagee because it has added terms that explicitly expand on the list of actions of the mortgagor that will not invalidate the insurance of the mortgagee.
In summary, when the standard mortgage clause is interpreted in the light of the settled principles that govern the construction of insurance contracts, there can be no doubt that the insurer, by virtue of this clause, is representing to the mortgagee that a separate and distinct contract exists between them, and that the validity of this independent contract depends solely on the course of action between the mortgagee and the insurer. Moreover, even if the language of the clause was ambiguous, art. 2499 C.C.L.C. reminds us that it would be necessary to resolve this ambiguity against the insurer. No mortgagee would wish that the validity of its "separate and distinct" contract with the insurer rest on the question whether its mortgagor dealt in good faith in effecting coverage on its (the mortgagor's) insurable interest. From the perspective of the mortgagee, this would stand to defeat the very purpose of relying on the standard mortgage clause in the first place.
I therefore conclude that to adopt the interpretation of the standard mortgage clause proposed by the Court of Appeal would turn the clause into a sort of trap for the mortgagee. By ostensibly holding out to the mortgagee that the validity of its insurance contract was unaffected by the course of action between the mortgagor and the insurer, the clause would induce the mortgagee to rely on the standard mortgage clause, only to belie this expectation if a loss occurred and the insurer discovered that the mortgagor had, in fact, made a misrepresentation when effecting its policy. I alluded in Scott v. Wawanesa Mutual Insurance Co., supra, at p. 1459, to the burden that rests on an insurer when it is offering insurance on terms that can reasonably be supposed to defeat the very objective of the coverage sought by the purchaser of insurance. By application of this principle it is clear that the insurer has, in this instance, failed to use the requisite degree of clarity if it has indeed wished to represent to the mortgagees who choose to rely on the standard mortgage clause that their coverage was in fact subject to defeat, in certain circumstances, solely because of the acts of the mortgagor.
The Historical Record
I turn next to a consideration of other factors that militate against the conclusion that the insurer may deny recovery to a mortgagee who has insured his interest through the medium of the standard mortgage clause solely because of the course of action of the mortgagor. I begin with a brief historical overview of the development of the standard mortgage clause, and a consideration of early judicial reaction to it.
As my colleague has noted, insurance companies would seem to have first incorporated the standard mortgage clause into their policies in the State of New York in the 1860s. Since that time, the clause has become, as its name reflects, the standard vehicle by which mortgagees insure their interest in encumbered property. However, it is important for present purposes to bear in mind that the standard mortgage clause, in gaining this ascendancy, eclipsed the use of what is known as the "loss payable" or "open mortgage" clause. As explained in Couch, op. cit., {SS} 42:702, by the terms of the latter clause, no privity of contract exists between the insurer and the mortgagee: the mortgagee is simply designated as the person who is to be paid in the case of a loss. In the result, there is an almost universal consensus in the authorities that the mortgagee, as a simple beneficiary, can recover solely on the same terms as the mortgagor. Accordingly, if the mortgagor is precluded from recovering on the policy by reason of a breach of its conditions, this breach will also preclude recovery on the part of the mortgagee.
It is precisely this feature of the "loss payable" or "open mortgage" clause that determined its fall into desuetude. As explained by Dwyer and Barney in their study entitled "Analysis of Standard Mortgage Clause and Selected Provisions of the New York Standard Fire Policy" (1984), 19 Forum 639, at p. 640:
Because the loss payable clause did not adequately protect the mortgagee's interest in insured property, use of the standard or union mortgage clause became more prevalent over time. In contrast to the simple loss payable clause, the standard mortgage clause generally has been construed by the courts as a separate insurance contract between the insurer and mortgagee. The most important consequence of interpreting the standard mortgage clause as independent insurance of the mortgagee's interest is that a mortgagee protected by this clause, in contrast to a mortgagee named in a loss payable clause, will not be denied recovery under a fire insurance policy solely because of the acts of the mortgagor.
The two clauses are clearly creatures of a different stripe, and it was only to be expected that a period of transition would be required before it was universally appreciated that under the new clause the mortgagee could no longer be equated to a simple beneficiary of the mortgagor. A reading of early judicial reaction to the clause confirms this. Hanover Fire Ins. Co. v. National Exchange Bank, 34 S.W. 333 (Tex. Civ. App. 1896), the decision which may be regarded as the fountainhead of the meagre line of authority rejecting the view advanced in Hastings, supra, provides a convenient example of the difficulties encountered by the courts in their efforts to come to terms with the purpose of the standard mortgage clause, and to appreciate the salient difference between it and the "loss payable" clause. The following excerpts from the decision leaves no doubt that the court essentially viewed the standard mortgage clause in the same manner as a "loss payable" clause, and was unwilling to accept that the standard mortgage clause is itself a vehicle by which the mortgagee obtains a separate and distinct contract of insurance with the insurer. Thus, at p. 334, Lightfoot C.J. says:
The doctrine is well established in this state that A., for a consideration paid by him, may make a contract with B., for the benefit of C., and the latter will have a right of action to enforce it. [. . .] But, if the contract was obtained by a fraudulent device of A., the person for whose benefit he fraudulently obtained it can gain no higher right than A. held, and, if the contract is void as to him, it is void as to his beneficiary.
At page 335, Lightfoot C.J. goes on to make this revealing concession:
We can readily see that a difference might arise in a case where the mortgage company, on its own behalf and for a separate consideration, procures a policy of insurance for its own benefit, unaffected by any act or concealment on the part of the owner of the property.
An examination of the early Canadian decisions also reveals that the courts remained fettered by the traditional view of the mortgagee as beneficiary of the mortgagor. Thus in one of the earliest Canadian decisions dealing with the problem of the nullity ab initio of the mortgagor's contract, Omnium Securities Co. v. Canada Fire and Mutual Insurance Co. (1882), 1 O.R. 494, the Ontario Court of Queen's Bench expressly repudiated the two contract theory as an explanation for the working of the standard mortgage clause, and again chose to view the mortgagee as a beneficiary of the mortgagor. Thus, at p. 496, Hagarty C.J. said:
It remains to consider the very serious question whether the defendants have the right to prove that the policy was obtained by fraud on [the mortgagor's] part. I must consider it as his insurance of his own interest, and although he makes the loss payable to the mortgagees, it does not thereby become the insurance of a mere mortgage interest.
Plaintiffs contend that the effect of the agreement between the parties by this subrogation clause, to which [the mortgagor] was no party, was in effect a new insurance as between them and the underwriters, and that the latter conclusively adopt and confirm it as such, irrespective of any fraud committed by [the mortgagor]. I do not think that the subsequent clause strengthens that view.
Without entering into that not very clear subject of "subrogation," we may treat it on the intelligible ground of a special bargain made, after [the mortgagor] had insured his premises, with his mortgagees, to whom he had made the loss payable.
In Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94, this Court was called on to deal with another instance where, as in this appeal, the contract with the mortgagor was found to be void ab initio. As pointed out by my colleague at p. 000 of her reasons in Caisse populaire, although the Court of Appeal had affirmed that the standard mortgage clause evidenced a separate contract between the insurer and the mortgagee, this Court evinced a reluctance to enter into a detailed examination of the workings of the clause. This is particularly clear in the following obiter remarks of Davies J., at p. 110:
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 alone and irrespective of [the mortgagor]. But we are all of the opinion that whether there was or was not such a direct contract, it did not cover or relate to the statements or omissions made by the applicant, [the mortgagor], in his application for insurance . . . .
Given that the Court decided the matter before it on other grounds, and expressly declined to consider the implications that flow from viewing the mortgage clause as providing for a separate and distinct contract between the mortgagee and the insurer, as opposed to making the mortgagee a simple beneficiary of the mortgagor, this decision becomes essentially irrelevant for present purposes. This Court first in London and Midland General Insurance Co. v. Bonser, supra, and then in Caisse populaire has expressed approval of the two contract theory as an explanation for the operation of the standard mortgage clause. Faced now with the problem of sounding out the consequences that flow from its adoption of that viewpoint, the Court is accordingly called on to deal with the very question it declined to consider in Liverpool and London, supra.
Turning from this consideration of the conceptual difficulties encountered by the courts in early attempts to understand the nature of the standard mortgage clause, I would observe that a historical overview of the introduction of the standard mortgage clause makes it clear that it became an all but universal feature of fire insurance policies precisely because it was perceived as providing for the creation of a separate and independent contract of insurance between the mortgagee and the insurer. To borrow the formulation of Sanborn Cir. J. in Syndicate Insurance Co. v. Bohn, supra, at p. 178, mortgagees renounced the use of the "loss payable" clause and elected to rely on the standard mortgage clause because that clause was perceived as constituting a representation by the insurer to the mortgagee that its interests were insured in a separate contract from those of the mortgagor, that the mortgagee's insurance was dependent for its validity solely upon the course of action of the insurance company and the mortgagee, and thus unaffected by any act or neglect of the mortgagor of which the mortgagee is ignorant.
The Advantages to the Use of the Standard Mortgage Clause
The advantages to all parties in insuring through the medium of the standard mortgage clause are obvious. First, it saves time and hence money. The underwriter need not issue two separate policies: by the simple expedient of the standard mortgage clause the insurer represents to the mortgagee that the one policy it issues in favour of the mortgagor in fact evidences two separate contracts, that between the mortgagee and the insurer being "engrafted" on that between the mortgagor and the insurer, to borrow the apt term found in Couch, op. cit., {SS} 42:728. Moreover, as explained by Professor Bergeron, op. cit., at p. 975, there are other advantages for the insurer:
[TRANSLATION] The insurer probably has most to benefit from proceeding through the debtor. It is in its interest to determine the risk as accurately as possible by dealing with the person directly associated with the property to be insured: that person is the owner, the hypothecary debtor. Otherwise there will be a great number of persons with whom the insurer must check, increasing both his expense and the delay.
It is, of course, at the instance of the insurer that mortgagees effect their coverage through the standard mortgage clause, and I share the conclusions of Professor Bergeron as to the advantages to the insurer in proceeding in this way. It would seem to be a commercial strategy well calculated to permit insurance companies to draw, in the most effective and economical manner possible, on their vast expertise in the assessment of the risk posed by a given application for insurance.
The expertise of lenders lies elsewhere: they are concerned with assessing the solvency of their borrowers, not their assurability. That being the case, I can, with respect, see little merit to the suggestion that mortgagees, on granting a mortgage, should bear the burden of guaranteeing the assurability of their mortgagors and that, as a result, the insurer should be entitled to hold up against the mortgagee any omissions or misrepresentations made by the mortgagor at the moment of effecting its own separate contract of insurance; see the observations of Bisson J.A. in Madill v. Lirette, supra, at p. 1002. In my respectful view, this would be an unfair delegation of responsibility on the part of insurers, all the more so since it is the insurer who represents to the mortgagee that it wishes to effect the insurance of both mortgagee and mortgagor through the agency of the mortgagor. I share the reservations expressed by Professor Bergeron, op. cit., at p. 988, to the effect that:
[TRANSLATION] We admit our surprise and it will be shared by the business community, including the risk industry. It is surprising to see given to the solvency specialists, if we may use the expression, a task which naturally belongs to risk specialists.
The standard mortgage clause has stood the test of time, and I am left with no doubt that it represents the most economical, rational, and fair procedure for effecting insurance on the interest of mortgagees. Its all but universal presence in fire insurance policies also attests to the fact that its use does not cut down in an unfair manner on the profits insurers recoup from the sale of fire insurance. Moreover, the American experience confirms that this is no less true if one proceeds on the assumption that the standard mortgage clause constitutes a representation by the insurer to the mortgagee that the validity of its policy is unaffected by the acts, neglects, omissions, and misrepresentations that the mortgagor may commit, whether they be committed by the mortgagor at the inception of its separate contract, or subsequent to its formation. In a word, once it is accepted that by the medium of the standard mortgage clause two separate and distinct contracts are issued in the one policy, it follows that any alternative to the use of the clause would seem guaranteed merely to arrive at the same end result (i.e., a separate contract for the mortgagee, and another for the mortgagor), but at the cost of generating needless delays, a flurry of paper, and a goodly amount of ultimately unproductive activity.
On this point, it is worth noting that the decisions that decline to follow Hastings, supra, and thus reject the thesis that the standard mortgage clause is designed to extend protection to the mortgagee in respect of omissions and misrepresentations made by the mortgagor at the inception of the contract, are all but unanimous in recommending that the mortgagee, when insuring its interest, adopt this alternative course of action and effect a separate policy on a separate piece of paper. Thus Galligan J. in Chenier v. Madill (1973), 2 O.R. (2d) 361 (H.C.), notes, at p. 365:
. . . it is to be observed that there is nothing which prevents a mortgagee from obtaining his own insurance to protect his security. If a mortgagee relies upon the insurance obtained by the mortgagor, he subjects himself to the risk that such a policy may be voidable if the mortgagor has violated stat. con. 1 of the policy.
As we have already seen, Lightfoot C.J. in Hanover, supra, at p. 335, also observes that the situation would be an entirely different one if the mortgagee had effected a separate and independent policy of insurance to protect his own interest. To the same effect is the following suggestion made by Bisson J.A. in Madill v. Lirette, supra, at p. 1002:
[TRANSLATION] If the hypothecary creditor does not have faith in the actions and the words of his insured before the policy is issued, all he has to do is take out a separate policy in his own name.
Academic literature also provides an echo of this line of reasoning. In his article "La faute intentionnelle de l'assuré et la clause de garantie hypothécaire" (1987), 21 R.J.T. 335, Simard explicitly endorses the view expressed by Bisson J.A.
However, in my respectful view, this notion that mortgagees who declined to rely on the standard mortgage clause and insured their interest by means of a separate policy would gain a measure of protection over and above the protection afforded by the standard mortgage clause cannot fail but be otiose once it is concluded that this clause itself evidences two separate and distinct contracts of insurance, one between the mortgagor and the insurer and a second (engrafted on the first contract) between the mortgagee and the insurer. In the final analysis, the authorities I have just reviewed reject the view espoused in Hastings because they, again, have chosen to view the mortgagee whose interest is insured through the standard mortgage clause on the same terms as a simple beneficiary of the mortgagor. (I note that Galligan J. in Chenier v. Madill, supra, relies on Omnium Securities, supra, which, as we have seen, did not adopt the two contract theory.) Once that view is put aside, and it is recognized that the mortgagee whose interest is insured by the standard mortgage clause is, in fact, a party to a separate and distinct contract with the insurer, the question of how the mortgagee effects that separate and distinct contract must, in my view, become one of form, and not of substance.
This is the view L'Heureux‑Dubé J. expresses at p. 000 of her reasons in Caisse populaire. There she observes:
There would not seem to be any valid reason for distinguishing between a policy taken out by the hypothecary creditor personally and one taken out by the latter through a mandatary, in the person of the hypothecary debtor. They are both separate insurance contracts in which the insured is the hypothecary creditor.
The Mortgagor as Mandator of the Mortgagee
I noted earlier that by the terms of the standard mortgage clause the mortgagor, when insuring its own interest in the property, assumes a mandate to take out a separate contract of insurance to insure the mortgagee's interest. This raises the question whether it could be argued that because the mortgagor is acting as the mandatary of the mortgagee when it insures the mortgagee's interest, it therefore follows that any false representations made by the mortgagor in effecting its mandate should be held to be those of the mortgagee. On this logic, the invalidity of the mortgagor's contract would entrain the invalidity of the mortgagee's contract as well.
I do not see how one can reasonably infer that the law of mandate operates so as to have this effect in the context of the standard mortgage clause. This inference would run counter to what must be taken to be the understanding of the parties when agreeing to insure through the medium of the standard mortgage clause, for, as was explained above, it was precisely because the standard mortgage clause held out the promise of making the mortgagee's insurance dependent solely on the course of action between the mortgagee and the insurance company that it supplanted the use of the "open mortgage" clause in the insurance industry. As put by Miller J. in Hastings, supra, at p. 150:
The mortgage clause was agreed upon for this very purpose, and created an independent and a new contract, which removes the mortgagees beyond the control or the effect of any act or neglect of the owner of the property, and renders such mortgagees parties who have a distinct interest separate from the owner, embraced in another and a different contract.
Accordingly, to hold that the law of mandate would have the result mentioned above would defeat the very purpose of the clause by again making the right of the mortgagee to recover on its policy derivative of the right of the mortgagor, provided only that the insurer could establish that the mortgagor had made any omissions or misrepresentations on taking out coverage to insure its (the mortgagor's) separate interest.
In discussing the principles governing the construction of contracts of insurance in Scott v. Wawanesa Mutual Insurance Co., supra, at p. 1454, I adverted to the approach set out by this Court in Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888. There it was made clear that in the construction of a contract of insurance a court must seek the interpretation which most fairly reflects what can reasonably be supposed to have been the intention of the parties when entering into the contract. Applying these principles here, I can only conclude that the notion that the insurer should be free to deny coverage to the mortgagee on the basis of a misrepresentation made by the mortgagor when insuring its interest would fly in the face of the mortgagee's reasonable perception of the very purpose of the standard mortgage clause.
As intimated above, it is only a matter of common sense that mortgagees will wish to effect insurance on their insurable interest so as to ensure that the validity of their contract with the insurer does not stand to be affected by anything the mortgagor might do, and as we have seen, clearly one option for the mortgagee who wishes to effect such coverage is to take out a separate policy on a separate piece of paper. It is, of course, at the instance of the insurer that mortgagees do not, in fact, make this trip to their insurer's office to effect independent policies on separate pieces of paper. In effect, the insurer represents to mortgagees that they can save themselves the trouble since the insurer will "engraft" this separate and distinct contract on the policy of the mortgagor. Given this representation on the part of the insurer, it is only fair to conclude that mortgagees will assume that insuring by means of the standard mortgage clause offers all the advantages of a separate and distinct contract evidenced by a separate piece of paper (the separate and distinct contract all the cases rejecting Hastings counsel mortgagees to obtain) but without any of its disadvantages, i.e, the trouble of having to obtain and deal with that separate piece of paper.
As noted by Professor Bergeron, op. cit., at p. 974, it cannot be the case that mortgagees accept to insure by means of the standard mortgage clause because they wish [TRANSLATION] "in so doing to protect their interest less". That conclusion would be to take mortgagees for fools; it would be tantamount to proceeding on the basis that mortgagees, in accepting to insure by means of the standard mortgage clause, were somehow resigned to settling for second rate coverage, i.e., coverage that did not offer the same protection as the separate and distinct contract they could effect without relying on the standard mortgage clause. It is, of course, the converse that must be true, for, clearly, if mortgagees elect to insure through the medium of the standard mortgage clause, they can only be doing so on the reasonable expectation that their interests will be protected in the same way as if they had entered into an independent contract evidenced by a separate piece of paper.
Moreover, as already demonstrated, nothing in the wording of the standard mortgage clause supports the conclusion that the insurer is proceeding on any other understanding. There is no language such as would indicate an unequivocal and manifest intention on the part of the insurer to offer insurance on the understanding that the coverage of the mortgagee was in any way dependent on the course of action between the insurer and the mortgagor. Rather, the language is to the opposite effect: it states in simple and unambiguous terms that the mortgagee's insurance will not be invalidated by any fault of the mortgagor. The terms used in making this representation are so clear, in my view, that there is no need to invoke the principle that is necessary to resolve any ambiguity on this point in favour of the insured. I have already drawn attention to the fact that insurers cannot rely on anything short of the clearest language when offering coverage on terms that would go to frustrating the legitimate expectations as to coverage of those purchasing the policy.
I conclude that by the terms of the standard mortgage clause the insurer has represented to the mortgagee that it will decline to set up as against the mortgagee any omissions and misrepresentations made by the mortgagor in effecting coverage for the mortgagee and which, by the ordinary application of the law of mandate, might otherwise be imputable to the mortgagee. Any other interpretation would, in my view, fail to concord with the reasonable expectations of the parties as to the coverage offered by the standard mortgage clause, and, indeed, by making the insurance of the mortgagee derivative to a certain degree on the course of dealings between the mortgagor and the insurer, would strike at the very raison d'être of the standard mortgage clause.
Disposition
For these reasons, I would allow the appeal with costs throughout, reverse the judgment of the Court of Appeal, and restore judgment of the trial judge.
//L'Heureux-Dubé J.//
English version of the reasons of L'Heureux-Dubé and Gonthier JJ. delivered by
L'HEUREUX‑DUBÉ J. (dissenting) -- This appeal was heard at the same time as Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 000 (hereinafter referred to as "Caisse populaire"), judgment rendered concurrently. In Caisse populaire, the issue concerned the legal relationship between an insurer and a hypothecary creditor where the debtor of the hypothecary creditor purchased an insurance contract containing a hypothecary (mortgage) clause and committed an intentional fault. In the present appeal, the issue is whether the nullity ab initio of an insurance policy, resulting from misrepresentations by the hypothecary debtor at the time the policy was bought, can be invoked against the hypothecary creditor.
Facts
In 1977 one Dimitrios (Jimmy) Katsikonouris borrowed $80,000 from the National Bank of Greece (Canada) and $21,800 from the appellants, who were doing business in partnership under the name Tava Enregistré. As security for these loans, Katsikonouris granted a first hypothec to the National Bank of Greece (Canada) and a second hypothec to the appellants, on properties owned by him at 2100‑2102‑2104 rue Bélanger est, in Montréal.
In the succeeding years six fires of varying size occurred in the buildings subject to the hypothecs. Those buildings were covered by an insurance policy issued by previous insurers. On January 24, 1983, following notice that his policy had been cancelled, Katsikonouris purchased a fire insurance policy from the respondents. At the time this policy was taken out, the broker acting for Katsikonouris answered "no" to the following three questions:
1.Does the applicant have other insurance?
2.Have there been losses in the last three years?
3.Has an insurer refused or cancelled a policy in the last three years?
The insurance policy issued by the respondents, providing coverage of $350,000, contained a hypothecary (mortgage) clause approved by the Insurance Bureau of Canada and used in fire insurance policies issued in Quebec and in the rest of Canada.
After the properties in question were completely destroyed by arson on June 25, 1983, the respondents refused to pay the indemnity to the hypothecary creditors, alleging that the policy was void ab initio because of the misrepresentations by Katsikonouris at the time the policy was purchased. The appellants and the National Bank of Greece (Canada) brought actions against Katsikonouris's insurers to claim the indemnity.
In a judgment on the actions brought by the hypothecary creditors, which actions were joined for hearing, the trial judge held, on the evidence presented to him, that the policy issued by the respondents was void ab initio as a consequence of the misrepresentations and omissions by the insured or his representative. He concluded, however, that the hypothecary (mortgage) clause prevented the respondents from relying on this nullity ab initio against the hypothecary creditors, and therefore that the latter were entitled to payment of the insurance indemnity. He accordingly allowed their action. The Court of Appeal allowed the appeal, reversed the Superior Court judgment and dismissed the actions of the hypothecary creditors, the appellants in this Court (the National Bank of Greece (Canada), plaintiff in the Superior Court, is not a party to the appeal in this Court).
Judgments
Superior Court, [1985] C.S. 1263 (Lamb J.)
The trial judge first noted that, through his broker, the hypothecary debtor had made numerous misrepresentations to the respondents so as to conceal from them the cancellation of an earlier insurance policy and the occurence of several fires of criminal origin on the insured property. He was of the view that these misrepresentations were such as to entail the nullity ab initio of the insurance contract between the hypothecary debtor and the respondents.
Proceeding to consider the argument of the insurance companies, which sought to invoke the nullity of the policy against the hypothecary creditors, the judge wrote (at pp. 1268‑69):
The wording of paragraph 1 of the mortgage clause which reads
This insurance and every documented renewal thereof ‑‑ AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN ‑‑ is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured,
is so broad that it can only be interpreted as a clear and unqualified renunciation by the insurers of their right to raise against the mortgage creditors a defence of nullity resulting from any act or neglect of the insured, whether the result of that act or neglect is a nullity ab initio or a nullity resulting from a cause arising after the policy had validly attached. Nothing in the clause purports specifically to limit or restrict the application of the word "any". The express renunciation of the insurers must therefore be read as intending to refer to absolute as well as relative nullity, in the absence of any words imposing a restrictive distinction between the two.
The meaning of the mortgage clause is unambiguous, but if any further evidence is needed as to the insurers' intent to renounce their rights to invoke as against the mortgagees both absolute as well as relative nullity, such evidence can be found in the inclusion in the clause of the words "omission or misrepresentation", words clearly contemplating nullity ab initio as well as relative. [Emphasis in original.]
As to the nature of the contractual relationship between the insurers and the hypothecary creditors, he added (at p. 1269):
Furthermore the language of the mortgage clause is such that it can only be regarded as a separate contract between the insurers and the mortgate [sic] creditors, wholly unaffected, as indeed its terms make clear, by the absolute or relative nullity of the policy vis‑à‑vis the insured.
This was the conclusion reached by Laflamme J. in the case of Lirette c. Great American Insurance Co., [1982] C.S. 49, and by Biron J. in the case of Caisse populaire des deux rives c. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1984] C.S. 1180. Both were carefully reasoned decisions with which this Court agrees. While they concern the effect to be given to the second paragraph of 2563 C.C. and thus do not involve the question of nullity ab initio, the principle of the separate contract which these decisions endorse is nevertheless applicable to this case.
He therefore concluded that the insurers were liable to the hypothecary creditors and allowed the actions by the appellants and the National Bank of Greece (Canada).
Court of Appeal, [1989] R.D.I. 46 (Monet and Beauregard JJ.A. and Desmeules J. (ad hoc))
Desmeules J. (ad hoc)
Desmeules J., with his two colleagues concurring, noted that the trial judge had relied inter alia on the Superior Court's decision in Lirette v. Great American Insurance Co., [1982] C.S. 49, reversed by the Court of Appeal since the judgment a quo was rendered, [1987] R.J.Q. 993 (sub nom. Madill v. Lirette). As the wording of the hypothecary (mortgage) clause considered by the Court of Appeal in Madill was the same as that which is at issue before this Court, Desmeules J. relied on that decision, from which he quoted at length. In that case, Bisson J.A. held for the majority that the nullity ab initio of the policy obtained by the insured carried with it the termination of the benefits conferred on the hypothecary creditor (at p. 49):
[TRANSLATION] I consider that a hypothecary (mortgage) clause, like the one appearing in policy P‑4, only protects the creditor once the contract has come into being, and from that time, for subsequent acts, neglect, omissions or misrepresentations by the owners of the insured property.
Desmeules J. noted that Bisson J.A. would have come to the same conclusion even had he recognized the existence of two separate contracts in an insurance policy containing a hypothecary (mortgage) clause. He further cited the Quebec Court of Appeal's decision in Vallée du Richelieu, Compagnie mutuelle d'assurance de dommages v. Caisse populaire des Deux Rives, [1988] R.J.Q. 2355, where Gendreau J.A., who had taken part in the Madill judgment, restated the Court of Appeal's position (at p. 50):
[TRANSLATION] . . . that is why we held that the hypothecary creditor's protection existed only if the insurance contract had actually and really been formed between the insured who had in fact requested it and the insurer who was preparing to undertake it. In deciding that there was no completed contract, that it was void ab initio, we rejected the recognition of the guarantee conferred by the hypothecary (mortgage) clause.
The conclusion of Desmeules J. conforms in all aspects to this jurisprudence of the Court of Appeal (at pp. 50‑51):
[TRANSLATION] The wording of the present hypothecary (mortgage) clause, in effect since 1972, refers to certain situations such as transfers of interest, vacancy or non‑occupancy or the occupation of the property for purposes more hazardous than those specified, and it subjects creditors to an obligation to inform the insurer as soon as they are aware of such situations.
These events are subsequent to the issuing of the insurance policy, and this leads me to conclude that it is such situations that the insurers sought to provide for in their hypothecary (mortgage) clause.
With respect, I consider that the nullity ab initio of the insurance policy issued by [the respondents] has the effect of invalidating the hypothecary (mortgage) clause contained in that policy as well, and that there is no reason to depart from the existing precedents.
He accordingly allowed the appeal and denied the appellants and the National Bank of Greece (Canada) the right to the insurance indemnity.
Beauregard J.A.
Beauregard J.A. was also of the view that the appeals should be allowed. The gist of his brief reasons reads as follows (at p. 47):
[TRANSLATION] Despite the use of the adverb "including", by application of the "rule" of interpretation noscitur a sociis or the ejusdem generis rule, we must conclude that "any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured" is an "act, neglect, omission or misrepresentation" which took place or was made after the policy was issued, just as "transfer of interest, vacancy or non‑occupancy or the occupation of the property for purposes more hazardous than those specified".
Analysis
As in the Caisse populaire appeal, supra, the present case concerns an insurance contract purchased by the hypothecary debtor, pursuant to an undertaking made in hypothecary loan contracts to keep the hypothecated property insured for the benefit of the hypothecary creditors. The insurance policy purchased from the respondents contains the standard hypothecary (mortgage) clause approved by the Insurance Bureau of Canada. I have set out the clause below.
The judgment of this Court in Caisse populaire is to the effect that the insurance clause in a hypothecary loan contract is a contract of mandate, by which the hypothecary debtor undertakes to insure the hypothecated property on behalf of his hypothecary creditor. The insurance policy taken out in accordance with this mandate contains a standard hypothecary (mortgage) clause which thus sets out two separate insurance contracts, one between the insurer and the hypothecary debtor and the other between the insurer and the hypothecary creditor. I refer to the reasons I gave in Caisse populaire in this regard and adopt them for these purposes.
Given these premises, this appeal must deal with the consequences of the alleged misrepresentations by the hypothecary debtor, first on his own insurance contract and then on the insurance contract between the hypothecary creditors and the insurers, in light of the existence of a standard hypothecary (mortgage) clause in the contract.
1. Nullity ab initio of the Hypothecary Debtor's Insurance Contract
Under arts. 2485 and 2486 C.C.L.C., the holder of an insurance policy must disclose to the insurer, in the utmost good faith, all the circumstances relevant to determining the risk, otherwise the contract may be cancelled at the insurer's request under art. 2487 C.C.L.C.:
2485. The policyholder, and the insured if the insurer requires it, is bound to represent all the facts known to him which are likely to influence a reasonable insurer materially in the setting of the premium, the appraisal of the risk or the decision to cover it.
2486. The obligation respecting representations is deemed met if the facts are substantially as represented and there is no material concealment.
There is no obligation to represent the facts known to the insurer or which from their notoriety he is presumed to know, except in answer to inquiries.
Misrepresentation or deceitful concealment by the insurer is in all cases a cause of nullity of the contract that the party acting in good faith may invoke.
2487. Subject to articles 2510 to 2515, misrepresentation or concealment by either the policyholder or the insured, in regard to the facts contemplated in articles 2485 and 2486, nullifies the contract at the instance of the insurer, even for losses not connected with the risks so misrepresented.
(Articles 2510 to 2515 C.C.L.C., mentioned in art. 2487 C.C.L.C., being concerned exclusively with life insurance, are not relevant here.)
According to the evidence, the hypothecary debtor or his representative did not disclose to the insurers various facts of importance in the insurers' determination of the risk, concerning inter alia previous insurance coverage, the occurrences of criminal fires on the insured premises and the refusal by the previous insurers to continue insuring the property. This non‑disclosure surely constitutes misrepresentation, as the trial judge found (at p. 1268):
The existence of the Pelletier, Symons policy, the decision of that insurer to cancel that policy, and the previous fires, all of criminal origin, which occurred in the building housing the insured's restaurant Athens by Night and in the Bélanger St. building, were facts known to Katsikonouris and which were material to the risk. Hofman's [Katsikonouris's broker's] failure to disclose these facts therefore nullifies the contract ab initio between the insured Katsikonouris and the Defendant Insurers. [Emphasis added.]
The Superior Court judge's conclusion in this regard and the resulting nullity of the insurance contract between the hypothecary debtor and the insurers were not disputed in the Quebec Court of Appeal and were not the subject of argument in this Court.
It thus seems clear that the hypothecary debtor's insurance contract is void ab initio because of the latter's misrepresentations when the policy was purchased.
2. Nullity of the Hypothecary Creditors' Insurance Contract
The hypothecary creditors purchased their insurance contract from the insurers through their mandatary, the hypothecary debtor. The mandate, set out in the insurance clause of the hypothecary loan contracts, provides that the hypothecary debtor must keep the hypothecated property insured for the lenders' benefit. Accordingly, by purchasing the insurance contract, the hypothecary debtor performed his mandate in accordance with his undertaking.
Under art. 1727 C.C.L.C. mandators, in this case the lenders, are bound by the acts of their mandatary in the performance of the mandate:
1727. The mandator is bound in favour of third persons for all the acts of his mandatary, done in execution and within the powers of the mandate, except in the case provided for in article 1738 of this title, and the cases wherein by agreement or the usage of trade the latter alone is bound.
The mandator is also answerable for acts which exceed such power, if he have ratified them either expressly or tacitly. [Emphasis added.]
As Rodière puts it, [TRANSLATION] "a mandatary [cannot] be regarded as a third party vis‑à‑vis the mandator" (Encyclopédie juridique Dalloz: Répertoire de droit civil, vol. 5, 2nd ed., "Mandat", at p. 26, No. 337). Domenget (Du mandat, de la commission et de la gestion d'affaires, vol. 1, Du mandat (1862)) specifically mentions the case of bad faith by the mandatary, stating that it cannot be invoked against third parties (at p. 257, No. 405):
[TRANSLATION] Bad faith by the mandatary could not even be invoked against third parties by the mandator, if indeed those third parties were not in bad faith, in accordance with the rule qui mandavit ipse fecisse videtur.
Since the hypothecary debtor was acting in accordance with his mandate by purchasing the hypothecary creditors' insurance contract, the misrepresentations he made at that time must therefore be regarded, for the purposes of considering the validity of this contract, as misrepresentations made by the hypothecary creditors themselves.
These misrepresentations by the broker will have, as to the insurance contract between the hypothecary creditors and the insurers, consequences similar to those produced on the hypothecary debtor's personal insurance contract. Thus, the misrepresentations of the hypothecary debtor, acting as mandatary of the hypothecary creditors, had the effect of misrepresenting the risk to the insurers and thereby vitiating their consent to the insurance contract purchased for the hypothecary creditors, in the same way as these misrepresentations vitiated the insurers' consent to the hypothecary debtor's insurance contract. The insurance contract between the insurers and the hypothecary creditors is thus also void ab initio.
3.Whether the Nullity ab initio Can Be Invoked Against the Hypothecary Creditors
The appellants argue, however, that the nullity of the hypothecary creditors' insurance contract, whether ab initio or otherwise, cannot be invoked against them on account of the undertakings made by the insurers and set forth in the hypothecary (mortgage) clause of this insurance contract. The content of this clause, which reads as follows, must therefore be considered:
(For use with Quebec Policy Forms only)
STANDARD MORTGAGE CLAUSE
(approved by the Insurance Bureau of Canada)
IT IS HEREBY PROVIDED AND AGREED THAT:
BREACH OF CONDITIONS BY MORTGAGOR, OWNER OR OCCUPANT
This insurance and every documented renewal thereof -‑ AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN -‑ is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk.
PROVIDED ALWAYS that the Mortgagee shall notify forthwith the Insurer (if known) of any vacancy or non‑occupancy extending beyond thirty (30) consecutive days, or of any transfer of interest or increased hazard THAT SHALL COME TO HIS KNOWLEDGE, and that every increase of hazard (not permitted by the policy) shall be paid for by the Mortgagee ‑‑ on reasonable demand ‑‑ from the date such hazard existed, according to the established scale of rates for the acceptance of such increased hazard, during the continuance of this insurance.
RIGHT OF SUBROGATION
Whenever the Insurer pays the Mortgagee any loss award under this policy and claims that -‑ as to the Mortgagor or Owner ‑- no liability therefor existed, it shall be legally subrogated to all rights of the Mortgagee against the Insured, but any subrogation shall be limited to the amount of such loss payment and shall be subordinate and subject to the basic right of the Mortgagee to recover the full amount of its mortgage equity in priority to the Insurer, or the Insurer may at its option pay the Mortgagee all amounts due or to become due under the mortgage or on the security thereof, and shall thereupon receive a full assignment and transfer of the mortgage together with all securities held as collateral to the mortgage debt.
OTHER INSURANCE
If there be other valid and collectible insurance upon the property with loss payable to the Mortgagee -‑ at law or in equity -‑ then any amount payable thereunder shall be taken into account in determining the amount payable to the Mortgagee.
WHO MAY GIVE PROOF OF LOSS
In the absence of the Insured, or the inability, refusal or neglect of the Insured to give notice of loss or deliver the required Proof of Loss under the policy, then the Mortgagee may give the notice upon becoming aware of the loss and deliver as soon as practicable the Proof of Loss.
TERMINATION
The term of this Mortgage Clause coincides with the term of the policy;
PROVIDED ALWAYS that the Insurer reserves the right to cancel the policy as provided by Articles 2567 and 2568 of the Civil Code of the Province of Quebec, but agrees that the insurer will neither terminate nor alter the policy to the prejudice of the Mortgagee without 15 days' notice to the Mortgagee by registered letter.
FORECLOSURE
Should title or ownership to said property become vested in the Mortgagee and/or assigns as owner or purchaser under foreclosure or otherwise, this insurance shall continue until expiry or cancellation for the benefit of the said Mortgagee and/or assigns.
SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shall supersede any policy provisions in conflict therewith BUT ONLY AS TO THE INTEREST OF THE MORTGAGEE), loss under this policy is made payable to the Mortgagee. [Emphasis added.]
The wording of this clause is very similar to the one considered in Caisse populaire, supra.
Before proceeding with the analysis of this clause as such, however, it may be worth taking a comparative look at the interpretation in other jurisdictions of clauses similarly worded to see whether the nullity ab initio of the insurance contract, as a consequence of misrepresentations by the hypothecary debtor, can be invoked against the hypothecary creditor.
A. Comparative Analysis
The hypothecary (mortgage) clause at issue here is in fact derived from clauses of the same type developed in the State of New York in the 1860s. This clause became widely used over the years throughout the United States and in Canada. Although known in France, it is seldom used there.
(i) France
The writers Picard and Besson in their classic treatise give an example of a hypothecary (mortgage) clause under which, according to them, the nullity ab initio of the insurance contract as a consequence of misrepresentation by the hypothecary debtor could not be invoked against the hypothecary creditor:
[TRANSLATION] This clause ‑‑ known as the standard hypothecary or mortgage clause ‑‑ has been in widespread use in America since the late 19th century. It is however quite rare in French practice. The guarantee it provides creditors of course varies according to the policy. The following is an example of the standard hypothecary clause:
"At the request of the insured, the Company agrees not to take advantage of (but only as to hypothecary creditors registered against the immovable pursuant to a deed recorded by Mr. X, a notary) the failure to make the declarations prescribed by the general conditions of the policy, but only to the extent that their debts fall in the correct order on the indemnity to which the insured would have been entitled if his position had been in order . . . ."
With a clause of this kind, hypothecary creditors whose names are given to the insurer cannot be affected by nullities or disqualifications incurred by the insured, in particular as the result of an incorrect declaration of risk, even if they knew of such irregularities before the loss. [Emphasis added.]
(Traité général des assurances terrestres en droit français, vol. 2, Assurances de dommages ‑‑ Règles générales (1940), at pp. 471‑73.)
This clause is clearly specific and provides that an inaccurate initial statement of risk will not invalidate the hypothecary creditor's right to indemnification. It is interesting to note that it was thought necessary to use a very specific formula so as to cover nullity of the contract resulting from the absence of consent by one of the parties. The hypothecary (mortgage) clause at issue here is different and contains no specific mention of an "incorrect declaration of risk".
(ii) United States
The mortgage clause used in insurance policies in the United States usually reads as follows, with regard to waiver of the right to raise the mortgagor's actions against the mortgagee:
It is hereby specially agreed that this insurance, as to the interest of the mortgagee 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. [Emphasis added.]
Unlike the case of the existence of a second separate contract in the same policy containing a hypothecary (mortgage) clause, discussed in Caisse populaire, the specific question of whether the nullity ab initio of an insurance contract because of the mortgagor's misrepresentations can be invoked against the mortgagee has not been dealt with by the U.S. Supreme Court. The plethora of judgments in various states on this point does however disclose two trends: the majority of the decisions hold that such nullity cannot be invoked against the mortgagee, and the minority hold that it can.
The first judgment of the majority view is probably the decision by the New York Court of Appeal in Hastings v. Westchester Fire Insurance Co., 73 N.Y. 141 (1878). In that case, the mortgagor had bought such insurance. One of the conditions was that any other insurance was to be disclosed to the insurer. The mortgagor, however did not reveal that he had other insurance. The mortgagor's wrongful act thus occurred at the very time the policy was bought. The New York Court of Appeal found this policy to be null and void with respect to the mortgagor, but rejected the insurer's defence that this nullity extended to the mortgage clause. In his judgment Rapallo J. found that there were two separate insurance contracts in the policy and went on to say (at p. 153):
To hold otherwise would, I think, defeat the purpose intended, and deprive the mortgagees of the protection upon which they had a right to rely. Although the clause might be construed so as to exempt the mortgagees from the consequences only of acts of the owners done after the making of the agreement, I do not think, in view of its apparent purpose, that any such distinction was intended. [Emphasis added.]
This case was followed by a long line of decisions by other courts, in which the refusal to allow the nullity ab initio of the insurance contract to be invoked against the mortgagee was justified either by referring to the intent of the parties or by interpreting the mortgage clause as a sufficiently express waiver by the insurer of its right to invoke the nullity: Syndicate Ins. Co. v. Bohn, 65 F. 165 (8th Cir. 1894); Reed v. Firemen's Insurance Co. of Newark, 35 L.R.A. (N.S.) 343 (N.J. 1911); Federal Land Bank of Columbia v. Atlas Assur. Co., 125 S.E. 631 (N.C. 1924); Collins v. Michigan Commercial Underwriters, 6 Tenn. App. 528 (1928); Fayetteville Building & Loan Ass'n v. Mutual Fire Ins. Co. of West Virginia, 141 S.E. 634 (W. Va. 1928); National Union Fire Ins. Co. v. Short, 32 F.2d 631 (6th Cir. 1929); Stockton v. Atlantic Fire Ins. Co., 175 S.E. 695 (N.C. 1934); National Fire Ins. Co. of Hartford, Conn. v. Dallas Joint Stock Land Bank of Dallas, 50 P.2d 326 (Okla. 1935); Western Assur. Co. v. Hughes, 66 P.2d 1056 (Okla. 1937); Great American Insurance Co. of New York v. Southwestern Finance Co., 297 P.2d 403 (Okla. 1956); Northwestern National Insurance Co. v. Mildenberger, 359 S.W.2d 380 (Mo. Ct. App. 1962); Equality Savings and Loan Association v. Missouri Property Insurance Placement Facility, 537 S.W.2d 440 (Mo. Ct. App. 1976); Meade v. North County Co‑Operative Insurance Co., 487 N.Y.S.2d 983 (Sup. Ct. 1985).
Despite these precedents, another line of authority, though less weighty, has taken the contrary view and denied the mortgagee the right to be indemnified where there have been misrepresentations by the mortgagor prior to or at the time the policy was bought. A specific example of this approach is found in Hanover Fire Ins. Co. v. National Exchange Bank, 34 S.W. 333 (Tex. Civ. App. 1896). In that case the insurance policy was vitiated ab initio because of a fraud committed when it was purchased. The trial court, in conformity with Hastings, held that the mortgagee had the right to be indemnified under the "standard" mortgage clause. In allowing the appeal the Court of Appeal said (Lightfoot C.J. for the court, at p. 334):
The fraudulent concealment of a fact so material to the risk itself, which fact was expressly provided against on the face of the policy, and a knowledge of which would have stopped the issuance of the policy, prevented it from becoming a valid contract in favor of the assured, or the party for whose security it provided. The doctrine is well established in this state that A., for a consideration paid by him, may make a contract with B., for the benefit of C., and the latter will have a right of action to enforce it . . . . But, if the contract was obtained by a fraudulent device of A., the person for whose benefit he fraudulently obtained it can gain no higher right than A. held, and, if the contract is void as to him, it is void as to his beneficiary. [Emphasis added.]
The court thus interpreted the formation of the second contract as the performance of a contract of agency between the mortgagee and the mortgagor. It went on to expressly reject the applicability of Hastings, concluding that the mortgagee could not validly claim both the benefits of the agency and immunity from its disadvantages. The court accordingly concluded that, in a case of fraud at the very time the policy is purchased (at p. 335): "The contract, as a whole, in such a case, must stand or fall" (see to the same effect, Graham v. Fireman's Insurance Co., 87 N.Y. 69 (1881); Young Men's Lyceum of Tarrytown v. National Ben Franklin Fire Ins. Co. of Pittsburgh, 163 N.Y.S. 226 (Sup. Ct., App. Div. 1917); Imperial Building and Loan Ass'n v. Aetna Ins. Co., 166 S.E. 841 (W. Va. 1932).)
Since the case law is thus divided and there is no ruling by the U.S. Supreme Court on the point, and as the wording of the clause in question differs from that at issue in the present appeal in a crucial respect, the U.S. precedents are of limited assistance.
(iii) Canada (common law)
The courts in the common law jurisdictions of Canada, including this Court, have on various occasions considered the question of whether the nullity ab initio of an insurance contract as the result of misrepresentations by the mortgagor when the contract was purchased can be invoked against the mortgagee.
In Omnium Securities Co. v. Canada Fire and Mutual Insurance Co. (1882), 1 O.R. 494, the Ontario Court of Queen's Bench rejected the solution put forward in the United States in Hastings four years earlier. Hagarty C.J. wrote (at pp. 496‑97):
It seems to me that this provision only points to the future, and that insurers are not thereby debarred from setting up that the insurance had been effected by fraud.
. . .
I do not think they [the insurers] thereby guarantee to him [the mortgagee] that his mortgagor has committed no such fraud upon them in effecting the insurance -‑ they do not warrant it to be an indisputable risk.
. . .
I repeat, I do not see how the insurers can be held to condone undiscovered fraud, or warrant the policy to be conclusively binding at the time of this bargain, any more than they could insist that the mortgagees warranted the validity of the mortgage as to title, value, &c., &c. [Emphasis added.]
The mortgage clause at issue in that case was similar in all respects to that used in the U.S. at the time. The judge accordingly rejected both the argument based on the apparent intent of the parties and the argument holding that, by giving the mortgagee the insurance contract found in the mortgage clause, the insurer had undertaken to guarantee the validity of the policy purchased by the mortgagor.
The same clause was involved in the judgment of this Court in Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94. The policy was found to be void ab initio, and the Court held per Davis J., with whom the majority concurred, that this invalidity could be invoked against the mortgagee (at p. 110):
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 alone and irrespective of [the mortgagor]. But we are all of the opinion that whether there was or was not such a direct contract, it did not cover or relate to the statements or omissions made by the applicant [the mortgagor], in his application for insurance and which were expressly made
the basis of the liability of the company, and a part and a condition of the insurance contract.
In our opinion the provision in the mortgage clause already quoted in words by me to the effect that
the insurance should not be invalidated by any act or neglect of the mortgagor or owner of the property insured, etc.
had reference to the subsequent acts or neglects of the mortgagor and did not apply to his application for insurance or his statements or omissions therein. [Emphasis added.]
This interpretation was again recently adopted by the Ontario High Court in Chenier v. Madill (1973), 2 O.R. (2d) 361, where Galligan J., citing Omnium Securities, supra, noted (at p. 365):
It is clear that the mortgage clause provides only against future acts by the insured. It has no relation to misrepresentation or fraudulent omissions by the insured affecting the validity of the contract of insurance . . . . Accordingly, if either of the defences of misrepresentation or fraudulent omission to disclose circumstances material to the risk succeed, the defendant [the insurer] would be justified in denying liability to the mortgagees. [Emphasis added.]
The judgment of the British Columbia Supreme Court in Canadian Imperial Bank of Commerce v. Dominion of Canada General Insurance Co. (1987), 29 C.C.L.I. 313, is to the contrary. In a short oral decision on a motion, Huddart J. held that the fact the policy was void ab initio could not be invoked against the mortgagee (at p. 316):
In my view, the only reasonable interpretation of the mortgage clause is that Mr. Dley suggests. By it the insurers are in effect entering into a separate contract with the mortgagee as an insured, a contract whose validity is independent of the acts or omissions of the owner.
Like the American precedents, most of the Canadian decisions on this point deal with hypothecary (mortgage) clauses whose wording is not in all respects identical to the one at issue here. In particular, they do not contain the words "omission or misrepresentation", which are present in the clause we are concerned with here. It is nonetheless interesting to note that these decisions almost unanimously hold that nullity ab initio resulting from misrepresentations by the hypothecary debtor at the time the insurance contract is purchased can be invoked against the hypothecary creditor.
This background does not dispense with the necessity of considering the wording of the hypothecary (mortgage) clause at issue in the present appeal so as to determine its true scope.
B.Analysis of the Words "Omission or Misrepresentation" in the Hypothecary (Mortgage) Clause: Wording and Context
The hypothecary (mortgage) clause in the insurance contract between the insurers and the hypothecary creditors is, as I have already mentioned, the standard formula approved by the Insurance Bureau of Canada, and is found in a great many insurance contracts throughout the country. The contract indeed contains both a French and an English version of this clause.
The crux of the problem is to define the exact meaning of the words "omission or misrepresentation" in subclause one of the hypothecary (mortgage) clause, by analysing first the words themselves and then their context.
(i) Wording
The appellants relied in particular on subclause one of the hypothecary (mortgage) clause, which states that "omission or misrepresentation" ("déclarations" in the French version) by the owner of the insured property cannot be invoked against the hypothecary creditors. For the sake of convenience, I shall set out the French and English texts of the first paragraph of subclause one of the hypothecary (mortgage) clause:
VIOLATIONS DU CONTRAT
Ne sont pas opposables aux créanciers hypothécaires les actes, négligences ou déclarations des propriétaires, locataires ou occupants des biens assurés, notamment en ce qui concerne les transferts d'intérêts, la vacance ou l'inoccupation, ou l'affectation des lieux à des fins plus dangereuses que celles déclarées.
BREACH OF CONDITIONS BY MORTGAGOR, OWNER OR OCCUPANT
This insurance and every documented renewal thereof -‑ AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN ‑- is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk. [Emphasis added.]
The appellants first contended that the term "omission or misrepresentation" can only apply to omissions or misrepresentations by the policyholder at the time the policy is purchased. With respect, it is not clear that this term has such a wide meaning here. If this term can in fact be applied to the initial declaration of the risk (arts. 2485 and 2486 C.C.L.C. and condition one of the insurance contract), it can equally apply to other situations: the owner (or tenant or occupant) of the insured property has an obligation to notify the insurer of any aggravation of risk (art. 2566 C.C.L.C.), as well as any loss affecting that property (arts. 2572 and 2573 C.C.L.C.). In particular, that part of the Civil Code of Lower Canada dealing with notification of loss is titled "Of the notification of loss". Further, the clause does not mention the concept of "concealment", the word used in art. 2487 C.C.L.C. in connection with the concealment of information at the time of purchase, which is one of the actions alleged against the hypothecary debtor in the present case. Accordingly, the words "omission or misrepresentation" by themselves are ambiguous. In view of this vague wording, it is necessary to examine the context in which the words "omission or misrepresentation" occur, so as to determine the meaning by an analysis of the other provisions of the insurance contract.
(ii) Context
The appellants base an argument on the use, in the English text of the hypothecary (mortgage) clause, of the present and future tenses of the verb "to be" ("is and shall be in force"), and conclude that the insurance contract is stated to be valid at the time it is purchased. In the appellants' submission, this immediate validation, concurrent with the formation of the insurance contract, is specifically designed to cover any misrepresentation by the policyholder. This argument is somewhat circular, however, since the policy could only be confirmed if it already exists. Thus, the present tense in the contract would apply to actions occurring at the time of formation, which are therefore subsequent to the purchase, preceding formation of the contract. This argument therefore does not appear to have the weight given to it by the appellants.
The wording of the first paragraph of the hypothecary (mortgage) clause contains a list of acts that will not affect the rights of hypothecary creditors. While this list is not in any way exhaustive, as indicated by the adverb "including", it indicates the type of acts the parties intended to include in the expression "act, neglect, omission or misrepresentation". All the items contained in this list ("transfer of interest, any vacancy or non‑occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk") can only take place after the policy has been purchased. As we know, in accordance with the rule of interpretation noscitur a sociis and its particular application, the ejusdem generis rule, the generality of a term can be limited by a series of more specific terms which precede or follow it. Professor Côté writes in this regard (The Interpretation of Legislation in Canada (1984), at p. 242):
Noscitur a sociis helpfully draws attention to the fact that a statute's context can indicate a meaning far more restrictive than that found in the dictionary.
Professor Côté further cites the following passage from Renault v. Bell Asbestos Mines Ltd., [1980] C.A. 370, concerning the ejusdem generis rule (at p. 372 of that judgment, per Turgeon J.A. for the court):
[TRANSLATION] The ejusdem generis rule means that a generic or collective term that completes an enumeration of terms should be restricted to the same genus as those words, even though the generic or collective term may ordinarily have a much broader meaning.
He added the following caveat, however (at pp. 244‑45):
Certain conditions must be satisfied for ejusdem generis to apply. According to some cases, the general expression must be preceded by several specific terms; otherwise there would be no genus permitting its restriction. But this condition is not universally respected, and its [sic] does not seem unreasonable to restrict the meaning of a broad expression even if it is preceded by only one specific term. Instead of ejusdem generis, the rule of noscitur a sociis could be invoked. Sometimes the courts have refused to apply ejusdem generis when a general term is preceded by only one specific term. However, such decisions have been based on ordinary principles of interpretation, and not simply on the fact that a single specific term preceded a general one.
A second condition for application of the rule, according to some authorities, is that the general term follow rather than precede the specific ones. But these cases do not eliminate the possibility of attenuating the meaning of generic terms with less general terms which follow. Even if strictly speaking ejusdem generis doesn't apply, the principle of contextual interpretation set forth by noscitur a sociis holds in any case.
As a third condition, the specific terms must have a significant common denominator to be considered within one given category. If this is lacking, ejusdem generis doesn't apply. [References omitted. Emphasis added.]
The acts listed in the present case, as mentioned above, are a homogeneous group having as their common feature occurrence after the purchase of the contract. I adopt in this regard the reasoning of Beauregard J.A. in the Court of Appeal when he wrote (at p. 47):
[TRANSLATION] Despite the use of the adverb "including", by application of the "rule" of interpretation noscitur a sociis or the ejusdem generis rule, we must conclude that "any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured" is an "act, neglect, omission or misrepresentation" which took place or was made after the policy was issued, just as "transfer of interest, any vacancy or non‑occupancy or the occupation of the property for purposes more hazardous than specified".
According to this interpretation, the words "omission or misrepresentation" would thus apply only to omissions or misrepresentations subsequent to the formation of a valid insurance contract between the hypothecary creditor and the insurer.
This interpretation in my opinion is confirmed by the wording of the second paragraph of subclause one of the hypothecary (mortgage) clause, which provides that the hypothecary creditor shall be liable for increased premiums resulting from increases in the risk. In this connection one must differentiate between an increase in the risk and a different risk resulting from misrepresentations by the holder of the insurance. In the case of misrepresentations when the risk was initially declared, there is not necessarily an increase in the risk since the insurer may simply refuse to insure the risk. Additionally, when these misrepresentations that aggravate the risk are subsequently discovered, an additional premium may be due the insurer to reflect the risk actually insured. Coverage of a different risk, on the other hand, is not a situation contemplated by the second paragraph of subclause one of the hypothecary (mortgage) clause, which makes the hypothecary creditor liable for additional premiums that may be due on account of an increase in the risk, but which could not apply to a different risk. This is a further indication supporting the conclusion that only omissions or misrepresentations subsequent to purchase are covered by the hypothecary (mortgage) clause.
The apparent generality of the words "omission or misrepresentation" is thus actually limited by what follows the first paragraph of subclause one of the hypothecary (mortgage) clause. This seems to indicate that the parties did not intend to cover the insurer's defect of consent resulting from misrepresentations by the hypothecary debtor when the insurance contract was taken out on behalf of the hypothecary creditors.
The word "any" in the English text, on which the trial judge relied, only qualifies the words "act, neglect" and it will differ in scope depending on the definition and scope of the words "act, neglect" in the English text, or "déclarations" in the French text, so that no conclusion can be drawn from this. If the "déclarations" or "act[s], neglect[s]" apply only to "déclarations" or "act[s]" subsequent to a valid contract, the word "any" cannot have the meaning given to it by the trial judge. Similarly, the words "is and shall be" seem to me to seal the fate of the meaning of the hypothecary (mortgage) clause only if it is assumed that the parties intended to guarantee insurance that is void ab initio, an intention which I do not impute to the parties.
The intent of the parties as indicated by the wording and context of the hypothecary (mortgage) clause seems to me to be all the clearer as the logic of the system requires that the mandator be bound by the misrepresentations of his mandatary, who himself has taken out a separate insurance policy with the insurers on behalf of the hypothecary creditors. In such a case, the second insurance contract thus entered into is in principle void ab initio. If that is the case, it seems to me that much more specific language than that in the hypothecary (mortgage) clause at issue would be needed to conclude that the parties intended to cover this nullity ab initio, as is the case in France for example.
Additionally, bearing in mind that Quebec insurance law is based on the [TRANSLATION] "genius of the French language" and [TRANSLATION] "North American practice" (Faribault, "Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300, at p. 308) in accordance with the opinion of the codifiers (see Caisse populaire), it would be surprising if the standard hypothecary (mortgage) clause at issue here were to be given a different interpretation here, as it is purely a question of the application of the rules of interpretation of contracts in either system, rules which are very similar. A clause to the same effect, though worded differently, is in use throughout Canada and has been interpreted on numerous occasions in the common law provinces as denying mortgagees the protection of an insurance contract that is void ab initio. If the parties intended to circumvent these precedents, which are not recent, they could easily have adopted a wording specifically designed to do so. In this connection the simple addition of the words "déclarations" in French and "omission or misrepresentation" in English, without further qualification, was not intended in my opinion to make it impossible to invoke against the hypothecary creditor "déclarations" or "omission[s] or misrepresentation[s]" made when the policy was purchased. I would instead interpret this addition as being intended solely to cover a possible lacuna in the earlier hypothecary (mortgage) clause, the language of which might suggest that the hypothecary debtor's "omission[s] or misrepresentation[s]" during the life of the contract could be invoked against the hypothecary creditor. It must be remembered that in our legal system it is the intent of the parties that governs and it was thus open to the contracting parties to indicate clearly their common intention to cover nullity ab initio of the insurance contract toward the hypothecary creditor if they could legally do so. In view of the wording and context of the hypothecary (mortgage) clause, in my opinion, such an intent has not been established.
This result is also consistent with the unanimous jurisprudence of the Quebec Court of Appeal: Duchesneau v. Great American Insurance Co., [1955] Que. Q.B. 120; Madill v. Lirette, supra; Amin v. Cie d'assurance American Home, [1989] R.R.A. 151; Veilleux v. Victoria Insurance Co., [1989] R.J.Q. 1075. This result is also in accord with the presumption of good faith implicit in any contract (art. 1024 C.C.L.C.), according to which the insurance contract, like any other contract, was concluded. Assuming, as it was entitled to do, the good faith of its insured when the insurance contract was formed, the insurer could not have had any reservations regarding the second contract attached to it in favour of the insured's hypothecary creditor. It has to be asked whether, in the absence of such good faith on the part of the insured, the insurer would have assumed the risk towards the hypothecary creditor, a risk which it agreed to run precisely because of the assumed good faith of its insured. In other words, in practical terms I find it hard to understand how an insurer, knowing before issuing the policy of the facts not declared or misrepresented here by the insured, would have concluded an insurance contract with that insured. Moreover, this contract has been declared void ab initio for this reason. The second contract, attached to the one concluded between the hypothecary debtor and the insurer under the mandate conferred by the hypothecary creditor, would thus not have been made in those circumstances. The position of the hypothecary creditor is accordingly no different here from what it would have been there.
If the parties did intend the hypothecary creditor to benefit from the policy's protection, even in a case where the insurer would have refused to issue a policy to the hypothecary debtor, they were obviously free to agree to this, subject of course to the validity of such an agreement. However, it seems to me that such an agreement, the effect of which would be to negate, with respect to the hypothecary creditor, the provisions in the policy (and the provisions of the law) regarding the initial misrepresentations of the insured hypothecary debtor, must be written in clear and express language. In my opinion, the hypothecary (mortgage) clause at issue here does not meet these requirements.
Additionally, the obvious advantage for the insurer and insured as well as for the hypothecary creditor in covering the insured risk in a single policy instead of using two separate contracts does not seem to me to be threatened by the conclusions at which I arrive. First, there is nothing to indicate that a second contract between the hypothecary creditor and the insurer could not have included restrictions regarding the initial statements by the insured so as to make the policy void ab initio with respect to protection of the hypothecary creditor. Second, the hypothecary (mortgage) clause attached to the policy issued to the hypothecary debtor retains its full value without any need to resort to the procedure of a second contract, so long as the parties expressly indicate the extent of the risk which the hypothecary (mortgage) clause is to cover.
Having found that the meaning of the hypothecary (mortgage) clause is free of ambiguity, it is not necessary to refer to the rule of interpretation contained in art. 2499 C.C.L.C.
Conclusion
I therefore conclude that the nullity ab initio of the insurance contract entered into by the appellants and the respondents, as a consequence of misrepresentations by the hypothecary debtor when this contract was purchased, is not covered by the wording of this clause. This conclusion, based on an analysis of the clause itself and its context, is in keeping with the majority interpretations given to various versions of the hypothecary (mortgage) clause by decisions of this Court and the Quebec Court of Appeal.
If, however, one had to conclude that the parties intended in the hypothecary (mortgage) clause that the insurers would waive their right to have the insurance contract invalidated ab initio, it would then be necessary to consider the validity of such a waiver (in this regard reference can be made, in particular, to Bouzat, "De la clause par laquelle une partie dans une convention s'engage à ne pas en demander la nullité" (1934), 54 Rev. crit. lég. et jur. 350). However, in view of the conclusion at which I have arrived it is not necessary to discuss this question here.
Accordingly, for all these reasons I would affirm the judgment of the Quebec Court of Appeal and dismiss the appeal, with costs throughout.
Appeal allowed, L'HEUREUX‑DUBÉ and GONTHIER JJ. dissenting.
Solicitors for the appellants: Mondor, Fournier, Montréal.
Solicitors for the respondents: Colas & Associés, Montréal.