Update on the Standard Mortgage Clause: How to asses the lender’s claim after a property sale

The recent decision by the Ontario Supreme Court in Equitable Trust v. Portage, 2014 ONSC 4767 (CanLII) deals with a lender’s entitlement to loss proceeds under the Standard Mortgage Clause (SMC) provisions after a property sale where the actual cash value (ACV) exceeded the amount remaining on the mortgage after application of property sale proceeds.

In Equitable Trust v. Portage, Equitable Trust Company (“Equitable”) sought summary judgment against the Portage La Prairie Mutual Insurance Co. (“PLP”). The matter arose as a result of a fire which destroyed PLP’s insured’s property.  PLP denied the insured’s claim on the basis of a misrepresentation in the proof of loss.  The actual cash value (ACV) of the home was $148,541.26 and, although the replacement cost was not discussed, the policy had a limit of liability of $500,000.

The insured defaulted on his mortgage payments.  Equitable ultimately sold the property, resulting in net proceeds of $150,706.71, which it applied to the mortgage loan. This resulted in a $98,682.88 shortfall remaining on the mortgage.  Equitable sought the amount remaining from PLP pursuant to the terms of the SMC.

PLP denied the claim, arguing that it was entitled to deduct the sale proceeds from the ACV. Thus, no payment was required since the proceeds exceeded ACV.

The court did not agree, finding that PLP was responsible for paying the amount remaining under the mortgage. The court reiterated that the SMC is a separate agreement between the mortgagee and the insurer, which protects the interests of the mortgagee to recover the proceeds of the policy notwithstanding any fault, default, action or inaction on the part of the mortgagor.

The court set out that:

1. a mortgagee’s right to recover is limited by the amount of the remaining secured debt;
2. the mortgagee only insures its security interest on the property, in contrast to the mortgagor who is insuring the property itself;
3. the mortgagee, despite acquisition of the property, is not obligated to repair the property, nor is it required to deliver a proof of loss if the insured has already done so;
4. the loss is properly calculated as the amount of the shortfall on the mortgage following the exercise of Power of Sale.

Therefore, PLP was able to recover the shortfall. However, insurers should be clear that payment to a lender of the “amount remaining under the mortgage” only applies to instances where the mortgage amount is less than the ACV of the home. The case does not specifically address the other common situation: where the mortgage amount exceeds both the ACV and replacement cost. In such cases, the bank may try and claim entitlement to the replacement cost, as opposed to ACV.  However, by confirming that the bank’s interest is limited to its “security interest”, the decision supports the position that even where the mortgage exceeds ACV, the bank’s claim is limited to ACV since that is the extent of its security (in addition to the land) that it took at first instance.

For prior posts on the Standard Mortgage Clause, please click here.