C.A. No. 123500
NOVA SCOTIA COURT OF APPEAL
Cite as: the Kings Mutual Insurance Company. v. Royal Bank of Canada,
Bateman, Hart, Jones, Matthews and Flinn, JJ.A.
BETWEEN:
THE KINGS MUTUAL INSURANCE ) Harry Wrathall, Q.C. and
COMPANY, a body corporate ) Deborah K. Smith
) for the Appellant
Appellant )
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- and - )
) Scott A. Gillis
) for the Respondent
ROYAL BANK OF CANADA, a body )
corporate, AVERY D. SCHOFIELD and )
PENNY ANN SCHOFIELD )
)
Respondents ) Appeal Heard:
) May 22, 1996
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) Judgment Delivered:
) June 11, 1996
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THE COURT: Appeal allowed per reasons for judgment of Flinn J.A., Hart, Jones, Matthews and Bateman, JJ.A. concurring.
FLINN, J.A.:
The main issue on this appeal is whether an insurer must give notice of termination of a fire insurance policy to an insured's mortgagee pursuant to a standard mortgage clause in the policy, where the policy lapses at the end of the term, and the insured does not renew the policy.
The facts, as found by the trial judge, are as follows. The appellant issued a fire insurance policy insuring the premises of the respondent Schofields for the period from September 7, 1990 to September 7, 1991. Schofields were the named insured in the policy. Under the terms of the policy loss was payable to the respondent bank, which held a mortgage on the property. The policy contained a standard mortgage clause which provided, among other things, as follows:
"5. 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 Statutory provision but agrees that the Insurer will neither terminate nor alter the policy to the prejudice of the Mortgagee without the notice stipulated in such Statutory provision."
The reference to "Statutory provision" is to Statutory Condition 5 of the policy dealing with termination of insurance. The notice stipulated for termination is "by the insurer giving to the insured fifteen days' notice of termination by registered mail, or five days written notice of termination personally delivered."
In July 1991, approximately 2 months before the expiry date of the policy, the appellant sent to the Schofields an offer to renew the policy. During the latter part of August 1991 an agent of the appellant spoke to the manager of the respondent bank. The bank was informed that the Schofields' policy was coming up for renewal, and that it would not be renewed if the agent did not receive the premium for the renewal. The manager of the bank advised the agent that the bank would not be paying the premium. Notwithstanding three subsequent reminders to the Schofields by the insurer's agent, the Schofields did not pay the renewal premium. The policy was not renewed, and, hence, expired, or lapsed, on September 7, 1991.
On September 17, 1991, the Schofields had a fire loss which resulted from a lightning strike. The Schofields filed a proof of loss with the appellant. Their claim was denied on the basis that the fire insurance policy had expired on September 7, 1991.
In an action commenced by the respondents against the appellant, the trial judge found the appellant, as insurer, liable to the bank, as mortgagee, for the full amount payable under the policy. The trial judge decided that he was bound by the decision of this Court in Bank of Nova Scotia v. Commercial Union Assurance Co. of Canada (1993), 123 N.S.R. (2d) 58 in which the majority concluded, in similar circumstances, that the insurer failed in its obligation to the mortgagee; namely, that it "will neither terminate nor alter the policy", without notice of termination to the mortgagee; and that the word "terminates", within the meaning of this obligation, includes the expiry, or lapse, of the policy, when the policy is not renewed.
Since the decision of this Court in Commercial Union, the Supreme Court of Canada, in Patterson v. Gallant, [1994] 120 D.L.R. (4th) 1 has considered the issue of whether an insurer is required to follow a formal termination procedure, where an insurance policy has expired or lapsed. Prior to dealing with termination Major J., writing for a unanimous Court, said the following about the concept of renewal of an insurance policy, at p. 7:
"Two separate meanings can be ascribed to a 'renewal' of an insurance policy. The first meaning results from a continuous policy. Such policies provide for further extensions to the term of an existing contract, subject to the rights of either of the parties to terminate the contract. In a single continuous policy, questions of formation are answered by reference to the original offer and acceptance that initiated the coverage. By contrast, the other meaning of a 'renewal' of an insurance policy involves the situation where a separate and distinct contract comes into existence at each renewal. Automobile insurance renewals fall into the latter category, in that each renewal represents a new contract with its own offer and acceptance." {Emphasis added}
The fire insurance policy, which is the subject of this appeal, also falls into the latter category. Each renewal represents a new contract.
In response to the argument that the insurer did not give notice of termination to the insured, under the statutory conditions of the policy, Major, J. said:
"It is unnecessary for the appellant to terminate or cancel the alleged insurance in accordance with stat. con. 8(1). This is only necessary where there is a binding insurance policy. Where the policy simply expires because of the non-payment of the renewal premium, no formal termination procedure need be followed by the appellant. To the extent that Colven Distributors Ltd. v. Allstate Insurance Co. (1992), 10 C.C.L.I. (2d) 157, [1992] I.L.R. ¶ 1-2886, 35 A.C.W.S. (3d) 97 (Ont. Ct. (Gen. Div.)), decided otherwise it should not be followed. In the absence of legislation to the contrary, which does not exist in this case, a lapsed policy does not need to be formally terminated." {Emphasis added}
The statutory conditions of the automobile insurance policy under consideration, in Patterson, are essentially the same as in the fire insurance policy which is the subject of this appeal. Further, while Patterson deals specifically with the obligation of the insurer to the insured, with respect to notice of termination, the same principle would apply when dealing with the obligation of the appellant (insurer) to the respondent bank (mortgagee), where there is a standard mortgage clause endorsement on the policy, the term of which mortgage clause "coincides with the term of the policy". The very best position which the mortgagee (bank) could advance, vis-a-vis the insurer, is that the effect of the standard mortgage clause endorsement on the policy is to bring the insurer and the mortgagee into privity, and to make the mortgagee "an insured". See London Loan & Savings Company of Canada v. Union Insurance Co. of Canada Ltd. (1925), 56 D.L.R. 570; affirmed 57 D.L.R. 651 (Ont. C.A.); See also London and Midland General Insurance v. Bonser, [1973] S.C.R. 10.
Therefore, on the basis of the decision of the Supreme Court of Canada in Patterson, which is binding on this Court, the appellant was under no obligation to give notice of termination to the respondent bank because the Schofield policy was about to lapse; or that the policy had, in fact, lapsed, because the renewal premium was not paid.
The obligation which the insurer has under the standard mortgage clause is, only, that it will:
"neither terminate nor alter the policy to the prejudice of the mortgagee without the notice stipulated ......" {Emphasis added}
Where the policy simply expires, or lapses, because of the non payment of a renewal premium, the insurer does not terminate nor alter the policy within the meaning of the standard mortgage clause.
I would, therefore, allow the appeal. I would reverse the judgment of the trial judge, and I would order that the claim of the respondent bank against the appellant be dismissed.
Under the circumstances, I would order that each party bear its own costs both here and in the Court below.
Flinn, J.A.
Concurred in:
Hart, J.A.
Jones, J.A.
Matthews, J.A.
Bateman, J.A.