LACK OF COVERAGE IN REAL ESTATE...

LACK OF COVERAGE INREAL ESTATE TRANSACTIONS

These materials were prepared by Ann Phillips,QC of Ann Phillips Law Office, Regina, Sask. for theSaskatchewan Legal Education Society Inc seminar, Insurance Law Update, March 1999.

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LACK OF COVERAGE IN REAL ESTATE TRANSACTIONS

(or Caveat Emptor, Caveat Mortgagee, and especially Caveat Solicitor!)

TABLE OF CONTENTS

I. FIRE INSURANCE BETWEEN CONTRACT AND CLOSING 1A. Facts 1B. The Position at Common Law and in Equity 3C. Can the Purchaser Rely on an Express Agreement or a Statutory Provision? 5

1. Express Agreement 52. Statutory Provisions 8

D. Application of Insurance Proceeds - Three Conflicting Statutes 81. The Limitation of Civil Rights Act.. 82. The Land Contracts (Actions) Act.. 103. The Agreements of Sale Cancellation Act.. 114. Acts Not Applicable to Executory Contracts? 115. Section 128 of The Insurance Act vs. The Fires Prevention (Metropolis) Act, 1774 14

II. Condominium Insurance - Mortgagee Protection 17A. Facts 17B. What is the mortgagee's position ifthere is a fire? ; 18

III. Vacancy : 19A. Vacating a House on Moving 21B. Knowledge by the Insurer of the Vacancy 23C. Seasonal Coverage 23D. Buildings Under Construction 23

APPENDIX "A" Checklist for Residential Real Estate TransactionsVendorPurchaserCondominium Purchaser (extra requirements)

APPENDIX "B" Standard Mortgage ClauseAPPENDIX "C" Sample Insurance Clauses for Condominium Corporations

LACK OF COVERAGE IN REAL ESTATE TRANSACTIONS

(or Caveat Emptor, Caveat Mortgagee, and especially Caveat Solicitor!)

I. FIRE INSURANCE BETWEEN CONTRACT AND CLOSING

A. FACTS

You're acting for Joe and Mary Byers, who came to you February 1 with the standard

Saskatchewan Real Estate Association form signed the day before by both of them, and by the

vendors, Peter and Paula Sellers. The price is $100,000 and they have mortgage approval from

their bank for a $70,000 mortgage. There is a $2,000 deposit. They have sufficient additional

funds to enable them to close. Possession is to be March 31.

The mortgage instructions require you to provide proof of insurance for replacement cost.

You tell the Byers, among other things, to arrange for insurance as of the possession date, March

31, and you receive confirmation of coverage from their agent February 19.

You get the cash to close in your trust account, and submit the Sellers' transfer (which you got

on trust conditions) and the mortgage to Land Titles.

On March 25, Joe Byers calls you first thing in the morning. Their new house burnt down last

night. The Sellers escaped with the family cat and a few treasured possessic)lls. He asks what

happens now.

The mortgage officer calls. She saw the fire on TV. She wonders about the insurance situation.

The Sellers' lawyer calls. He tells you the Sellers had insurance, but only enough to cover the

mortgage they had taken out. He says that, unfortunately, he must insist that the deal go through.

Your mail comes in. Land Titles has registered the transfer and mortgage.

You begin to review the documents:

1. The Agreement of Purchase and Sale.

Residential Contract of Purchase and SaleDeveloped & provided by the Saskatchewan Real Estate Association,Revised 1997."5. ADJUSTMENTS re: taxes, rents, insurance, utilities, expensesand other income and outgoing, to be made as at possession date, or asfollows: _6. The Seller warrants that all items are free from encumbrances andshall be and remain as is at the date of acceptance of this Offer and at thecost of the Seller including insurance coverage and condominium feesuntil adjustment date. All existing blinds, awnings, screen doors andwindows, attached floor coverings, drapery tracks, curtain rods andbrackets, electrical, plumbing and heating fixtures and attachments,furnace, T.V. antenna, trees and shrubbery (delete items not applicable),including the following:

are owned by the Seller and conveyed to the Buyer under this contract.Water heater included ; not included ; etc.8. If every reasonable effort is made to fulfil or perform all of the

Iconditions in this Offer and the conditions cannot be reasonably fulfilledor performed, the entire depositand any other monies paid shall beforthwith returned to the Buyer and this contract shall be null and void. Ifthis Offer is accepted and the Buyer fails to execute any requiredconveyance or formal documents when prepared or fails to pay anyrequired cash payment or comply with any of the terms in this contract,this contract shall be void at the Seller's option and the Buyer agrees thatthe said deposit shall be forfeited to the Seller.

2. The "Property Condition Disclosure Statement - Form 201 12/96". This formmakes no reference to insurance.

3. Sellers' lawyer's trust condition letter.

"Immediately upon receiving confirmation that the Transfer and Mortgagehave been registered, you will requisition mortgage proceeds from yourclient's mortgagee.

Conditional upon receiving the net mortgage proceeds, you will forthwithtender to this office the balance due to close together with interest at 5%from the possession date until the date that the funds are received in thisoffice.

In the event your client's mortgagee refuses to advance the mortgageproceeds, you will immediately notify this office in writing."

, We undertake as follows:

1. To return the cash to mortgage to you in the event either of thefollowing circumstances occur:

(a) title to the subject property does not issue in your client'sname free and clear of all encumbrances, except for the(existing mortgage).

(b) Your client does not receive vacant possession of thesubject property on the possession date.

2. Upon your advice that title has issued in your client's name andconditional upon our receipt of the balance of the purchase price,we undertake to payout the (existing mortgage) and pay all taxesup to December 31 of this year."

What do you do now?

B. THE POSITION AT COMMON LAW AND IN EQUITY

The basic common law rule is that once a contract for the sale of land becomes unconditional,

the risk of loss is on the purchaser. I

Also, in the absence of express agreement or a relevant statutory provision, the purchaser does

not have the benefit of any insurance carried by the vendor. A policy of insurance is personal to

the insured and does not run automatically with the land? Rayner v. Preston, the English leading

case, has been followed and accepted as the law in Canada: A fire loss occurred before the real

estate transaction was completed. The vendor was insured. The purchaser claimed the benefit of

Di Castri, Law of Vendor and Purchaser, §548, and cases cited in f.n. 625; Brown, Craig, "Protecting thePurchaser's Interest Pending Completion ofa Contract of Sale ofa Building", (1984) 62 Can. Bar. Rev.

) 498 at 499.

the insurance proceeds from the vendor. Nothing in the contract referred to loss or insurance.

The purchaser was still required to pay the full price without abatement. The Court of Appeal

held that the contract of purchase and sale did not pass the benefit of the vendor's insurance to

the purchaser.

Does this mean the vendor gets paid twice, once by the purchaser, once by the insurance

company? In theory, no. Castellain v. Preston3, arising out of the same fire as Rayner v.

Preston, was an action by the vendor's insurer against the vendor. The insurer was entitled to

reimbursement of what it had paid to the vendor, because of the vendor's recovery from the

purchaser. The insurer, having paid, was subrogated to the vendor's right under the contract of

purchase and sale.4

The insurer has three choices:

1. pay the loss to the vendor and be reimbursed from the price received by the

vendor from the purchaser;

2. if the vendor has already received payment from the purchaser, the insurer may

withhold payment;

3. enforce the contract against the purchaser in the vendor's name but for the

insurer's own benefit.

The effect of the subrogation principle leaves the vendor, the insured, with little option but to

insist that the purchaser complete the purchase. In our case, the Sellers cannot make a private

arrangement with the Byers to let them withdraw from the contract: the insurance company's

consent is required.

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(1881), 18 Ch. D. 1 (C.A.); Di Castri, §541.(1883), 11 Q.B.D. 380 (C.A.)The Saskatchewan Insurance Act, s. 132 (1): The insurer, upon making any payment or assuming liabilitytherefor under a contract, shall be subrogated to all rights of recovery of the insured against any person, andmay bring action in the name of the insured to enforce such rights.

C. CAN THE PURCHASER RELY ON AN EXPRESS AGREEMENT OR A

STATUTORY PROVISION?

1. Express Agreement

The SREA residential agreement (see page 2) includes nothing that could reasonably be termed:

(a) are-allocation ofthe risk ofloss to the vendor;

(b) an agreement to assign the insurance policy to the purchaser;

(c) an agreement to assign the insurance proceeds to the purchaser.

At best, there is a warranty that:

(a) the vendor will maintain insurance coverage, and

(b) the house ("all items") will be in the condition it was at the date the agreement

was signed.

Recall that breach of a warranty entitles one to damages; it is only breach of a condition that

entitles the innocent party to rescind.

The SREA residential agreement vaguely provides for making adjustments of insurance as at the

possession date. Today, of course, insurance coverage is almost always terminated on a change

of ownership, rather than assigned to the purchaser and adjusted as of possession.

Contrast this with the Saskatchewan Real Estate Association commercial agreement:

9. "The Seller shall maintain fire insurance coverage on the property until thepossession date and, if on such date remains an unpaid Seller, maycontinue to insure the property. The Buyer shall insure the property onand after possession."s

SSREA Fonn # 104 12/96. No transfer of risk; no assignment of policy or proceeds.

Contrast also the clause commonly used by lawyers who are fortunate enough to get to prepare

an agreement of purchase and sale for their client:

All buildings and chattels included in the sale shall be and remain at therisk of the Vendor until such time as the Purchaser assumes ownership ofthe property. Pending completion of the sale, the Vendor will hold allinsurance policies and the proceeds thereof in trust for the parties as theirinterest may appear and in the event of damage to the said premises, thePurchaser may either have the proceeds of the insurance and complete thepurchase or may cancel the agreement and have all monies theretofore(sic) paid returned without interest.6

While the standard SREA residential agreement is almost unintelligible on the subject of

insurance, there is one case that may support it, with very similar wording.

In Denesuk v. Zajanczkowski and Zajanczkowski7, a house was partly burned during the interval

between contract and completion, while occupied by the vendors. The purchaser (plaintiff) knew

the vendors had insurance, and the vendors were in fact paid for their loss by the insurance

company. The purchaser wanted to complete, and tendered the balance of the purchase price,

after allowing for (Le. deducting) the insurance proceeds paid to the vendors. The vendors

wanted to keep the insurance money, and have the purchaser pay for the repairs.

At trial, the vendors argued that based on the case law, the purchaser had no right to the

insurance money by the mere fact of purchasing the insured property. The purchaser had to pay

the full purchase price, at which time the insurance company could recover from the vendor any

amount paid to him for the fire loss. If, however, the vendor allowed an abatement of the

purchase price without the insurance company's consent, the vendor would be liable to refund

that abatement to the insurer.

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7

Clause from 1997-98 SKLESI Bar Admission materials re insurance, p. 69, Residential Sales andMortgages[1948] 1 W.W.R. 225 and [1948] 2 W.W.R. 494 (Man. c.A.)

The trial judge agreed that these principles applied, but only where there was no reference in the

contract of purchase and sale to the existing policy of insurance. In this case, there was such a

reference.

Denesuk Contract"The vendor agrees to leave all screens,storm windows, storm doors, all electricalfixtures, and all buildings situated on theland. Unearned fire insurance premiums,taxes and insurance to be adjusted to thefirst day of July 1947. Also possessiongiven on the same date of the wholebuilding."

SREA Residential Contract"All items of fixtures and chattels are freefrom encumbrances and shall remain as isand at the cost of the Vendor, includinginsurance coverage until possession date,at the date of acceptance of this offer. Thepurchase price shall include all existingfixtures, including but not limited to,blinds, awnings, screen doors andwindows, attached floor coverings,drapery tracks, curtain rods and brackets,electrical, plumbing and heating fixturesand attaclunents."

Major, J. held (and he was upheld by the Manitoba Court of Appeal, without written reasons)

that this made the purchaser the equitable assignee of the policy of fire insurance on the building

and also of the monies payable under the policy. The purchaser was therefore entitled to succeed

in the action for specific performance, and could compel the vendors to apply the insurance

money either in abatement of the purchase price or towards restoring the building.

The law with respect to assignments of insurance policies in Saskatchewan is governed by both

the common law (and equity) and The Choses in Action Act. A legal assignment must be in

writing, not just by way of charge, and express notice must be given to the insurer. Equitable

assignments simply require that the policy, or a benefit under it, has been made over to a third

party.8 Choses in Action Act assignments must be in writing, subject to any restrictions on

transfer of the original contract. Legal, equitable and statutory assignments are all subject to

equities between the insurer and the assignor. In effect, the insurer must consent to the

assignment of the policy or proceeds to be bound.

) Brown and Menezes, Insurance Law in Canada, 2nd ed., page 370.

2. Statutory Provisions

The insurance provisions of Saskatchewan's property statutes are not well documented in

insurance texts. For the residential real estate practitioner in Saskatchewan, the following

statutes potentially apply:

The Agreements for Sale Cancellation Act

The Land Contracts (Actions) Act, especially sections 2, 3 and 5

The Limitation ofCivil Rights Act, especially sections 13 and 40.

The Condominium Property Act, 1993 (see pages 15 to 18 below)

The Saskatchewan Insurance Act, especially Part IV, sections 123 to 132

The Choses in Action Act

The Fires Prevention (Metropolis) Act, 1774

D. APPLICATION OF INSURANCE PROCEEDS - THREE CONFLICTING

STATUTES

1. The Limitation ofCivil Rights Act

The decision in DenesuJ! also relied on a statutory provision in Manitoba which is similar to

Saskatchewan's.

Manitoba Law of Property Act, RSM 1940

s. 40(1). Notwithstanding anythingcontained in any other Act or in anyagreement for sale of land...or in anymortgage of land... , in the event ofdamage to or destruction of buildings onthe land by fire the purchaser or mortgagormay...apply to the Court of King's Benchfor an order governing the application ofany moneys received or receivable underany insurance policy, in respect of such

The Saskatchewan Limitation of CivilRights Act, s. 13s. 13 (1): Notwithstanding anythingcontained in any agreement for sale ofland...or in any mortgage of land.. , in theevent of damage to or destruction ofbuildings on the land by fire the purchaseror mortgagor may...apply "to a judge of theCourt of Queen's Bench for an ordergoverning the application of any moneyreceived or receivable under an insurancepolicy, in respect of the damage or

9 See r.n. 7.

damage or destruction and ... the courtmay make an order directing theapplication of such moneys on themortgage or agreement for sale or inrebuilding, restoring or repairing thebuilding damaged or destroyed, or partlyin the one way and partly in the other."

Page 9

destruction; and...the judge may make anorder directing the application of thosemoneys on the mortgage or agreement ofsale or in ...rebuilding, restoring orrepairing the building damaged ordestroyed, or partly in the one way andpartly in the other.

In Nokinsky v. Bank ofMontreal, 10 Gerein, 1. applied section 13 in a situation when a farmer's

house was destroyed by fire after the Bank had obtained a final order of foreclosure on his farm

property. The Bank was unable to foreclose the home quarter because of The Farm Security Act

staying foreclosures against homestead property. The insurer was prepared to pay the farmer to

rebuild his house; the Bank saw an opportunity to have the insurance proceeds applied against its

mortgage debt. The insurance policy contained a standard clause in favour of the mortgagee, and

the farmer had also assigned the insurance proceeds to the Bank. The court directed that the

insurance company apply the money to rebuilding the farmer's residence. The Bank should not

get a windfall because the land it could not seize as a homestead lost its status because the farmer

could not rebuild his home.

While Gerein, 1.'s reasoning was based on an incomplete reading of the standard insurance

policy mortgage clausell that would limit its effect to mortgagees who have title or ownership of

property (i.e. after foreclosure), which is not the usual interpretation of that clause, the result

seems defensible based on the public policy embodied in The Limitation ofCivil Rights Act. In

particular, section 40 of The Limitation of Civil Rights Act, mentioned by Gerein, 1., would

override any contractual arrangement - such as an assignment of insurance proceeds,. or such as a

mortgage loss payable clause - limiting the effect of section 13. In fact, section 40 purports to

make such arrangements void, and money paid pursuant to such arrangement recoverable. 12

10

II

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(1985) 14 C.C.L.I. 48"6. Foreclosure - Should title or ownership to said property become vested in the Mortgagee and/orassigns as owner or purchaser under foreclosure or otherwise, this insurance shall continue until expiry orcancellation for the benefit of the said Mortgagee and/or assigns."SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shall supersede any policyprovisions in conflict therewith BUT ONLY AS TO THE INTEREST OF THE MORTGAGEE), lossunder this policy is made payable to the Mortgagee." See also Appendix "B".Section 40(1) Subject to subsection (2), every agreement or bargain, verbal or written, express orimplied, that this Act or any provision thereof shall not apply or that any benefit or remedy provided by itshall not be available, or which in any way limits, modifies or abrogates or in effect limits, modifies or

Even more important is section 2 of The Limitation ofCivil Rights Act, which provides:

"2(1) Where land is hereafter sold under an agreement for sale in writing, ... thevendor's ... right to recover the unpaid balance due shall be restricted to the landsold... and to cancellation of the agreement for sale...or sale of the property, andno action shall lie on the covenant for payment contained in the agreement for

. sale...

(2) The benefit of subsections (1) and (1.1 ) extends to and includes:

(a) the personal covenant of the purchaser contained in anyassignment by the vendor of such an agreement for sale;

(b) the personal covenant of the assignee contained in any assigmentby the purchaser of such an agreement for sale...

tand no action lies on any such personal covenant."

This has been held on many occasions to limit the vendor to the right to retain the deposit if the

purchaser decides against completion. Damages for loss of bargain cannot be claimed. 13

2. The Land Contracts (Actions) Act

It is well known in Saskatchewan, if nowhere else, that this statute requires leave of the Court of

Queen's Bench for a vendor ofland to bring an action under an agreement for sale oflandfor:

(a) Specific performance;

(b) Cancellation (rescission);

(c) Sale or possession of land or other relief.

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abrogates any such benefit or remedy, is null, void, and of no effect, and moneys paid under or by reason ofany such agreement or bargain are recoverable in any court of competent jurisdiction.[Subsection (2) is the exception for corporate bodies to opt out of the Act.]e.g. Clift v. Tonnelier (1983), 144 D.L.R. (3d) 188; Osman v. Callender (1986), 48 Sask. R. 23; SimmieMgmt. Ltd. v. Kal-A Invt. Ltd. [1987] 4 W.W.R. 755.

The leave application is preceded by a reference to the Provincial Mediation Board, and a

minimum 30 day wait.

It is not possible to contract in any way out of the Act, or the effect of the Act, unless the

purchaser or mortgagor is a corporate body: section 5.14

This gives a procedural advantage to a purchaser who wishes to withdraw from a purchase; one

wonders why so many vendors accept purely nominal deposits.

3. The Agreements of Sale Cancellation Act

Not only can you. not contract out of The Land Contracts (Actions) Act - your right to a

particular form of procedure - this Act requires any proceedings by a vendor to end a contract or

agreement for the sale of land to be brought in court, unless the price is under $250, and you

cannot agree to do it any other way. IS

While The Agreements of Sale Cancellation Act pertains to proceedings by a vendor to

determine, rescind or cancel an agreement for sale of land, it does not prevent a vendor from

defending an action by the purchaser for specific performance. 16

4. Acts Not Applicable to Executory Contracts?

Is "an agreement of purchase and sale" -such as the SREA Residential Contract of Purchase and

Sale - in fact subject to the trio of statutes above regulating an "agreement for sale of land"?

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Section 5(1): Subject to subsection (2), every agreement or bargain, verbal or written, express or implied,that this Act or any provision of it shall not apply or that any benefit or remedy provided by it shall not beavailable, or which in any way limits, modifies or abrogates or in effect limits, modifies or abrogates anysuch benefit or remedy, is null, void and of no effect, and moneys paid under or by reason of any suchagreement or bargain are recoverable in any court of competent jurisdiction.Section 2: Notwithstanding any term or provision to the contrary in a contract or agreement for the sale ofland in Saskatchewan now or hereafter entered into, all proceedings by a vendor to determine or put an endto or rescind or cancel the contract or agreement shall be had and taken by proceedings in a court ofcompetent jurisdiction.

The Saskatchewan Court of Appeal thinks not, when the purchaser has not gone into possession

and the contract remains executory (to be completed) and the statute is The Land Contracts

(Actions) Act. Lozinski v. Mayoh 17 dealt with a house transaction gone sour. The plaintiff agreed

to sell a house to the Mayohs in January, closing in March. The closing was then extended to

August, and in the meantime, the Mayohs moved in on a lease basis. In May, the Mayohs said

they would not be going through with the purchase. In June, they renegotiated the rent down,

and then did not pay it in full. The long-suffering Mrs. Lozinski re-listed and sold the house at a

lower price, suing the Mayohs for damages for loss of her bargain, miscellaneous expenses of

sale, and arrears of rent. In defence, the Mayohs claimed misrepresentations as to the size of the

lot and its landscaping, and claimed the benefit of The Limitation ofCivil Rights Act, section 2.

The trial judge dismissed the action without hearing evidence on the grounds the action was a

nullity because of non-compliance with The Land Contracts (Actions) Act.

The Court of Appeal sent the matter back for trial. The action was not one which required

compliance under this Act. Tallis, J.A., while stating that he was confining his decision to The

Land Contracts (Actions) Act, stated:

"Our task in this case, like any other case involving the construction of it statute isto give effect to the intent of the Legislature. To divine that intent, we traditionally look first to the words of the statute and if they are clear, we need go nofarther. Applying this principle to the within appeal, I hold that the plaintiffsclaim for damages for breach of this executory contract is not an 'action' withinthe intendment of s. 2(b) of the Act. Accordingly, the appellant is entitled tosucceed on this ground.

My conclusion is further reinforced by examination of the language andlegislative history of the Act as a whole. Learned counsel for the appellantcanvassed this aspect of the appeal in some detail. Accordingly, I will only touchbriefly on the legislative history. During the Great Depression of the Thirties andfor some years following, purchasers and mortgagors in this province were visitedwith a series of misfortunes over which they had no control -- economicstagnation with its elements of drought, depressed prices for primary products andmassive unemployment. With no legislative protraction from creditors, propertyowners, both urban and rural, faced the prospect of losing their homes and theirpotential source of livelihood from farming and other occupations. Some were in

16

17Sharp v. Miller, [1998] TWL QB98363(1984) 32 Sask. R. 312; 9 D.L.R. (4th

) 304.

fact forced from their homes to join the ranks of the itinerant or migratoryunemployed. The Legislature finally intervened to stem this tide and extendedprotection to prevent further disaster at the hands of aggressive financialinstitutions and creditors. 'New Deal' legislation was not confined to the UnitedStates of America. Our Legislature introduced and passed numerous legislativeprograms to grapple with the perils of the depression and its aftermath -- TheFarm Security Act, R.S.S. 1978, c. F-9, is but one example of this type· oflegislation.

In my opinion, the legislation under consideration on this appeal was not aimed atan executory contract as pleaded in this case but rather at protecting people whohad executed contracts and taken possession of the land."

Logically, this reasoning should be applicable to "agreements for sale" in The Limitation ofCivil

Rights Act. The Court ofAppeal declined an opportunity to extend Lozinski to The Limitation of

Civil Rights Act in Koszman v. Van Dusen. 18 The parties had an agreement of purchase and sale

for a hotel. The vendor gave the purchaser financial statements that the purchaser said (and the

court found) were misleading. He refused to complete, and the vendor eventually sued for

damages. McIntyre, 1. held that section 2 of The Limitation ofCivil Rights Act was a complete

defence, notwithstanding Lozinski. He referred to cases before Lozinski involving executory

contracts and claims for damages at the Queen's Bench level, in which section 2 had been

successfully asserted as a defence. 19 He also referred to two cases after the Lozinski decision in

which this case was apparently not cited.2°

The Court of Appeal held that the evidence disclosed was sufficient to support the judge's

finding as to the vendor's misrepresentation. There was no error oflaw in the conclusion of the

trial judge. There was no basis to interfere with the findings of fact. They refrained from any

consideration whether there was an agreement for sale within the meaning of section 2 and the

effect of that section on an action for relief such as sought in this case.

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19

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[1989] 4 W.W.R. 73Clift v. Tonnelier, (see r.n. 13) and Rochdale Mall Corp. v. Damon Dev. Ltd [1983] 6 W.W.R. 64.Osman v. Callender and Simmie Mgmt. Ltd v. Kal-A Invt. Ltd (see r.n. 13)

5. Section 128 of The Insurance Act versus The Fires Prevention (Metropolis) Act,

1774

Both these statutes also conflict while trying to resolve disputes over the application of insurance

proceeds after a fire has occurred. Section 128(1) sets out statutory conditions deemed to be part

of every contract in force in Saskatchewan, and which cannot be varied by contract. Statutory

condition 13 provides:

"13(1) The insurer instead of making payment may repair, rebuild or replace theproperty damaged or lost, giving written notice of its intention so to dowithin thirty days after receipt of the proofs of loss.

(2) In that event, the insurer shall commence to so repair, rebuild or replacethe property within forty-five days after receipt of the proofs of loss andshall thereafter proceed with all due diligence to the completion thereof."

The Fires Prevention (Metropolis) Act, 1774, confers on any person interested in any building

damaged by fire the right to require the governors or directors of insurance offices:

"to cause the insurance money to be laid out and expended as far as the same willgo, towards rebuilding, reinstating or repairing such house or houses or otherbuildings so bumt down, demolished or damaged by fire." (full text at page 16)

The former gives a right to the insurer; the latter to the insured (or "any person interested").

Canadian case law conflicts as to whether both these provisions are in force, or whether the

statutory condition of The Insurance Act (uniform throughout the provinces) has superseded the

old Imperial statute.

Royal Bank v. Pischkil, a Saskatchewan case decided by Doak, D.C.J. in 1933, held that The

Insurance Act was a complete code of insurance law and so section 83 of the 1774 Act had been

superseded.

21 [1933] 1 W.W.R. 145

Ingre v. Barker 22and Re Alliance Assurance Company23, both decisions from British Columbia,

expressly rejected the reasoning in Royal Bank v. Pischke to the effect that The Insurance Act

was a complete code, and ordered the insurance companies to rebuild on the request of (in both

cases) the.owner.

More recently, MacLeod, J., in Wawanesa Mutual Insurance Co. v. Co-operative Fire and

Casualty Company,24 held that The Insurance Act was not a complete code, particularly in the

area of automobile insurance and excess coverage, limiting its application as a code to fire

insurance. In light of Royal Bank v. Pischke, he stated: "I am satisfied... that The Fires

Prevention Act was repealed in Saskatchewan by implication by The Saskatchewan Insurance

Act of 1915."

In Federal I!usiness Development Bank v. Katschke,25 it was assumed that The Fires Prevention

(Metropolis) Act was in force in Alberta and would apply in favour of an insured owner as

opposed to a mortgagee. Neither the Saskatchewan nor the B.C. cases were cited. In that case,

however, the insurer had denied coverage to the hotel owner and had paid FBDB as mortgagee

under the mortgage clause. Master Quinn denied the owner the right to elect under The Fires

Prevention (Metropolis) Act on the grounds that the owner had no claim in law for insurance and

therefore had no right to require the rebuilding ofhis hotel.

The reasoning in these cases is unsatisfactory. Royal Bank v. Pischke is probably wrong in

determining that The Saskatchewan Insurance Act is a complete code, but may be right in saying

(though not holding) that the two provisions are inconsistent. In particular, considering whether

or not The Insurance Act is a complete code, no court has referred to section 13(1) of The Land

Contracts (Actions) Act which clearly applies to fire insurance and affects the operation of

statutory condition 13.

21

22

23

24

25

[1933] 1 W.W.R. 145(1960),31 W.W.R. 590(1961),33 W.W.R. 180(1981),2. W.W.R. 735(1992), 1 Alta. L.R. (3d)

In addition, the 1774 statute, if drafted grammatically, does not make logical sense. I have

divided the run-on text into subparagraphs to emphasize my point.

Section 83 The Fires Prevention (Metropolis) Act:

"... it shall and may be lawful to and for the respective governors or directors ofthe several insurance offices for insuring houses or other buildings against loss byfire, and they are hereby authorized and required,

upon the request of any person or persons interested in or intitled unto any house orhouses or other buildings which may hereafter be burnt down, demolished ordamaged by fire, or

upon any grounds of suspicion that the owner or owners, occupier or occupiers, or otherperson or persons who shall have insured such house or houses or other buildingshave been guilty

of fraud, orofwilfully setting their house or houses or other buildings on fire,

to cause the insurance money to be laid out and expended, as far as the same will go,towards rebuilding, reinstating or repairing such house or houses or other buildings soburnt down, demolished or damaged by fire,

unless the party or parties claiming such insurance money shall, within sixty days nextafter his, her or their claim is adjusted, give a sufficient security to the governorsor directors of the insurance office where such house or houses or other buildingsare insured, that the same insurance money shall be laid out and expended asaforesaid, or

unless the said insurance money shall be in that time settled and disposed of to andamongst all the contending parties,

to the satisfaction and approbation of such governors or directors of such insurance officerespectively."

An insurance checklist for real estate practitioners has been included as Appendix "A".

II. CONDOMINIUM INSURANCE - MORTGAGEE PROTECTION

A. FACTS

Your client is buying a condominium apartment. She has mortgage approval for a substantial

part of the purchase price. The mortgagee's instructions to you require replacement cost

insurance, and require that there be a standard mortgage clause in its favour in the insurance

policy. (See Appendix "B")

The condominium corporation owns the apartment building and everything structural in your

client's unit: the floors and ceilings, the walls, the plumbing, the stove and fridge. The

corporation's insurance policy covers all of these things to replacement cost value. However, the

policy cannot and will not name your client's mortgagee under a standard mortgage clause, since

its rights are restricted to your client's unit. Your client's insurance agent tells you that the only

coverage insurance companies will provide to your client is restricted to her personal property

and any improvements she makes to her unit.

The condominium corporation's bylaws are either the old statutory or the new statutory bylaws,

neither ofwhich mentions mortgagees or insurance.

It is theoretically possible to obtain insurance for the mortgagee's interest in the unit.

Section 67(1) of The Condominium Property Act, 1993 permits a unit owner to have an insurance

policy for the unit in an amount equal to the mortgage debt at the time of any loss. Under such a

policy, the insurer must pay to the mortgagee(s) in order of priority the least of:

1. The policy value;

2. The amount of the loss;

3. An amount to payout the mortgagees).

The condominium policies I am aware of do not provide this kind of coverage. They do

frequently contain the following:

1. Contingent coverage for a unit if the condominium corporation coverage falls

short, on a replacement cost basis. (This is potentially of value to the mortgagee.)

2. Coverage for the owner's share of a special assessment made by the condominium

corporation, if damage exceeds the corporation's insurance. (This is also

potentially valuable to the mortgagee.)

3. Unit betterments and improvements. In some cases, this coverage is only for

betterments made by the insured. Lavish improvements made by previous

owners, especially if structural, may be considered property of the condominium

corporation, and insured under its policy. Look for these words:

"made by you or acquired under ariy sales agreement""made by you or acquired at your expense"

B. WHAT IS THE MORTGAGEE'S POSITION IF THERE IS A FIRE?

The Condominium Property Act, 1993 requires the condominium corporation to apply the

insurance proceeds it receives to rebuilding so far as is possible (section 66). This requirement is

subject to:

1. A unanimous resolution terminating condominium status: section 83;

2. An application to terminate condominium status by the corporation, an owner or a

mortgagee of a unit: section 84(1);

3. An application to "settle a scheme" short of terminating condominium status by

the corporation, an owner or the mortgagee of a unit: section 102.

If the application to terminate succeeds, the court may adjust the effect of the order as between

the corporation, owners and mortgagees. If the condominium status is terminated, the

corporation is dissolved (section 85), and the mortgagee can apply to the court for an order

directing the disposition of assets (section 86).

As part of the settlement of a scheme under section 102 (when a building is damaged, but not

destroyed), the court can order, among other appropriate terms:

1. reinstatement in whole or in part;

2. transfer of interests of owners whose units have been wholly or partly destroyed

to other owners in proportion to their unit factors;

3. direct application of insurance proceeds;

4. direct payment by the corporation or owners;

5. amend the condominium plan.

There is a potential conflict between sections 84 and 102 and statutory condition 13 of The

Insurance Act which gives the insurer the right to rebuild. Both sections 84 and 102 permit the

insurer to be represented on the application, although this does not solve the substantive issue.

The other statutory provisions referred to above should also be considered to the extent they

affect the mortgagor-mortgagee relationship.

If you are lucky, the condominium corporation will already have bylaws expressly dealing with

insurance policies, what happens after a major disaster, and what is to be done with insurance

proceeds.

Appendix "c" contains sample condominium bylaw provisions that might be of assistance.

III. VACANCY

From the legal viewpoint, "vacancy" presents a problem:

1. As a definitional matter;

2. As a factual matter;

3. As it applies to seasonal dwellings, whether summer cabins, or winter homes

deserted by snowbirds;

4. As it applies to houses being built or undergoing renovation.

Some policies still do not define "vacant". However, a common form of definition distinguishes

between a building that is "vacant" and one that is simply "unoccupied". For example:

Vacant. A new dwelling is vacant after it is completed and before an occupantmoves in. An old dwelling is vacant when an occupant has moved out andanother has not yet moved in.

As an example, in a B.C. case,26 plaintiffs agreed to buy a house July 1, and had the insurance

transferred over to them. The transaction closed July 15, and the vendors left. The purchasers

planned to move in about mid-August, but unforeseen circumstances prevented the move until

September 8. The house was checked occasionally by a relative and by the real estate agent,

who discovered a hairline crack in a second floor toilet tank on September 1 which had caused

flooding damage. There was a vacancy exclusion from coverage for loss occasioned if the

building was vacant more than 30 days. Although the trial court granted relief from forfeiture

because on the facts, there was no causal connection between the flooding and the vacancy, the

B.C. Court of Appeal reversed, holding that sporadic inspection, the presence of wall to wall

carpeting and custom drapes, and an intention to occupy did not disprove "vacancy" within the

meaning ofthe policy.

Policies vary in their approach to vacancy. In some cases, basic coverage simply ceases when a

building is vacant. (Check policy under "Loss or Damage Not Insured".) However, the policy

usually contemplates that the insurer can permit vacancy, although some coverages cease even

with vacancy permission, such as water damage, burst pipes, vandalism, etc.

26 Hirst v. Commercial Union Assurance Co. ofCanada (1978) 8 B.C.L.R. 396; [1979] LL.R. 1-1071;reversed 70 B.C.L.R. (2d) 361.

Statutory condition 4,27 requiring the insured to notify the insurer of a material change in the risk,

also applies. Vacancy, or lack of occupancy for a lengthy period, is usually considered by

insurers to be a material change in the risk, particularly after an otherwise insured event occurs.

On being notified of the change, the insurer may terminate coverage or request a higher

premium.

Generally speaking, vacancy and unoccupancy clauses, if clear, are enforced by Canadian

courts. For example, in Sikorski v. Continental Insurance CO.,28 an insured house was never

occupied while owned by the insured. The insurer's agent thought the building would be

occupied by the insured or his sons, and completed the application form stating that the building

was occupied without asking the insured, who could not read English, but who signed the

application. [In those days, vacancy or unoccupancy for more than 30 days without permission

from the insurer was a statutory condition, rather than simply a policy condition, as it is now.]

Despite the equities in his favour, the insured was unsuccessful. More recently, in Roundy v.

Grain Insurance and Guarantee Co./9 the Saskatchewan Court of Queen's Bench enforced a

vacancy clause even though it was on a summer.cabin, and even though the insured never had a

copy of the group pol~cy containing the vacancy exclusion. (However, the plaintiff, while failing

against the insurer, did recover damages against the agent who should have explained the

situation.)

A. VACATING A HOUSE ON MOVING

In Mason v. Royal Insurance,3D the New Brunswick Court of Appeal upheld a trial decision that

an insurance agency had breached its duty of care to house owners when the agent failed to

advise them appropriately. They moved out of their house on November 26 and the pipes froze

December 15, before the sale of the property was finalized (there was a four day vacancy clause

for freezing). The loss was not covered. The agent was fully liable.

27

28

29

) 30

Section 128, The Insurance Act: 4. Any change material to the risk and within the control and knowledgeof the insured shall avoid the contract as to the part affected thereby, unless the change is promptly notifiedto the insurer or its local agent, ...[1933] 2 W.W.R. 388 (Sask. C.A.)(1991),5 C.C.L.I. (2d) 144(1992), 126 N.B.R. (2d) 183

Often, insurance policies expressly state "vacant, to your knowledge". This is of assistance to

landlords whose tenants vacate without their knowledge.

In Lutes v. Pearl Assurance Co}! tenants vacated without securing the house or informing the

landlord on July 27. The landlord did become aware through other sources that the tenant would

be leaving that day, but did not go to the house until July 29. On the afternoon of July 28, one

day after the vacancy, the house was extensively vandalized. On August 25, 28 days after the

vacancy, a fire of unknown origin completely destroyed the house. The landlord then sold the

property for $90,000 to a real estate developer.

The landlord reported the vandalism damage to his insurance agent on July 29 and again after the

fire. The New Brunswick trial court held that the vandalism loss was not covered because the

policy provided no liability for loss or damage while the building insured was vacant irrespective

of any permission for vacancy elsewhere in the policy. However, the fire loss was covered

because it did occur within the 30 day period permitted in the policy. Vacancy during the 30

consecutive day period was not a change material to the risk.

Another close call in New Brunswick [Lewis v. Economical Mutual Insurance Company,32 a

decision of the Court of Appeal] arose when a tenant vacated on January 14 (except for a few

items). The father of the insured landlord drained the water pipes that day, and four days later

his mother wrote the insured in Edmonton to inform him of the vacancy~ The plaintiff landlord

got the letter about January 21, but mistakenly thought he had 90 days to give notice to his

insurer. The house was totally destroyed by fire on February 14 (31 days after the vacancy).

The vacancy clause in question, however, required knowledge by the insured of the vacancy,

and the loss was held to be covered. Knowledge by the insured's parents was not enough: they

were not his agents.

31

32(1978),23 N.B.R. (2d) 43216 N.B.R. (2d) 408

B. KNOWLEDGE BY THE INSURER OF THE VACANCY

If the insurer, or the insurer's agent, knows that the property is vacant, the insurer may be

estopped from denying validity due to vacancy (i.e. the insured has recovered); and both insurers

and insureds have been successful in claiming against agents with knowledge ofvacancies.

In Melnick v. Cumis General Insurance Co., 33 the insurer was estopped from raising the vacancy

clause against a homeowner. The insured told the insurer's sales representative that she had just

bought a house for the first time, that although the closing date was December 8, she would not

be moving into it until three weeks later. Moreover, she was in fact in Toronto and would not be

returning to St. John's, Newfoundland, where the house was, until after the closing. When the

insured returned on December 13, she discovered a water pipe had broken and the water had

caused extensive damage. The vacancy clause in question was four days (for flooding). Because

the sales representative had no notes on file with respect to vacancy discussions, and because the

plaintiff insured was believed that she had been told by the sales representative that the house

would be fully covered, it was.

C. SEASONAL COVERAGE

Some policies define "vacant" in a different way for seasonal dwellings, e.g. "A Seasonal

dwelling is vacant if most of the furnishings have been removed." "Vacancy also means that no

one has been living in your dwelling for a full year." Generally, the coverage will differ from

ordinary residence coverage, some predictable, others not. Predictable are vandalism exclusions

(in areas where vandalism is a problem), and money limits on specific portable property (even if

daniaged by, say, fire).

D. BUILDINGS UNDER CONSTRUCTION

Buildings undergoing renovation are often vacant, and often are at greater risk o.f loss or damage

because of the types of activities going on. Unless specific needs for coverage are notified to the

insurer, any loss is not likely to be covered. The longer the workmen take, the greater the risk to

the insured becomes. A three-day vacancy exclusion was upheld where a fire occurred two

months after the last occupation of a dwelling, during which time workmen were doing repairs.34

In an Alberta case, an insurance company and its agent gave permission to complete a house

under construction. The town building inspector issued a stop work order alleging faulty

workmanship and materials. The insured stopped work, and did nothing on the house from

October until the following June, without notifying the agent or the insurer. The fire from

unknown causes that broke out in June was not covered.35

33

34

35

(1992), I.L.R. 1-2812Cormier v. Economical Mutual Insurance Co. (1977) 18 N.B.R. (2d) 565; affirmed (1977) 20 N.B.R. (2d)188; 83 D.L.R.(3d) 196.Danielson v. Union Marine & General Insurance Co. (1956) 17 W.W.R. 655

APPENDIX "A"

CHECKLIST FOR RESIDENTIAL REAL ESTATE TRANSACTIONS

VENDOR

D Advise vendor to have insurance agent continue coverage until date of payment, likely to beAFTER the possession date.

D Is vacancy permission or coverage required, both BEFORE the possession date and AFTERthe possession date?

D Is construction permission or coverage required AFTER the possession date because ofpurchaser's activities?

PURCHASER

D Advise purchaser to have insurance agent obtain coverage from the date the contractbecomes unconditional.

D Send vendor a supplement to the agreement of purchase and sale in which vendor disclosesamount and details of insurance, amount of mortgage outstanding, and agrees that buildingsremain at vendor's risk until completion, and vendor will hold proceeds of insurance in trustfor purchaser.

D Is vacancy permission or coverage required, both BEFORE the possession date and AFTERthe possession date?

D Is construction permission or coverage required AFTER the possession date because ofpurchaser's activities?

D Is seasonal coverage required?

CONDOMINIUM PURCHASER (EXTRA REQUIREMENTS)

D Review condominium corporation bylaws, condominium corporation and individual policy.D Anticipate problems in coverage for mortgagee, if mortgage instructions require standard

mortgage clause.

APPENDIX "B"

STANDARD MORTGAGE CLAUSE (IRC 3000 or IFC 18019)

IT IS HEREBY PROVIDED AND AGREED THAT:

1. Breach of Conditions by Mortgagor, Owner or Occupant. This insurance and everydocwnented renewal thereof - AS TO THE INTEREST OF THE MORTGAGEE ONLYTHEREIN - is and shall be in force notwithstanding any act, neglect, omission ormisrepresentation attributed to the Mortgagor, Owner or occupant of the property insured,including transfer of interest, any vacancy or non-occupancy, or the occupation of the propertyfor 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 anytransfer of interest or increase in hazard THAT SHALL COME TO HIS KNOWLEDGE; andthat 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 ofrates for the acceptance of such increased hazard, during the continuance of this insurance.

2. Right of Subrogation. Whenever the Insurer pays the Mortgagee any loss award underthis policy and claims that - as to the Mortgagor or Owner - no liability therefor existed, it shallbe legally subrogated to all rights of the Mortgagee against the Insured; but any subrogation shallbe limited to the amount of such loss payment and shall be subordinate and subject to the basicright 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 themortgage or on the security thereof, and shall thereupon receive a full assignment and transfer ofthe mortgage together with all securities held as collateral to the mortgage debt.

3. Other Insurance. If there be other valid and collectible insurance upon the property withloss payable to the Mortgagee - at law or in equity - then any amount payable thereunder shallbe taken into account in determining the amount payable to the Mortgagee.

4. Who May Give Proof of Loss. In the absence of the Insured, or the inability, refusal orneglect of the Insured to give notice of loss or deliver the required Proof of Loss under thepolicy, then the Mortgagee may give the notice upon becoming aware of the loss and deliver assoon as practicable the Proof of Loss.

5. Termination. The term ofthis 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 theprejudice ofthe Mortgagee without the notice stipulated in such statutory provision.

6. Foreclosure. Should title or ownership to said property become vested in the Mortgageeand/or assigns as owner or purchaser under foreclosure or otherwise, this insurance shallcontinue until expiry or cancellation for the benefit of the said Mortgagee and/or assigns.

SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shallsupersede any policy provisions in conflict therewith BUT ONLY AS TO THE INTEREST OFTHE MORTGAGEE), loss under this policy is made payable to the Mortgagee.

APPENDIX "C"

SAMPLE INSURANCE CLAUSES FOR CONDOMINIUM CORPORATIONS

1. Payment of Proceeds

The proceeds of all insurance carried by the Corporation are payable to the Corporation

and held by it as trustee for the owners [and those mortgagees who have filed written

notice with the Corporation, as their interests shall appeaL]

2. Value for Co-insurance Purposes

The Corporation's insurance policy will provide that the value of the building for co

insurance purposes only includes the original structure, plus any improvements made by

the Corporation.

3. Owners' Property Insurance

An owner may carry insurance on improvements made by the owner and not by the

Corporation, for fixtures, furniture and equipment of the owner contained in the unit, for

loss of use, contingent coverage, special assessment coverage, and mortgagee coverage.

[Note potential overlap with condominium policy]

An owner carrying such insurance must file a certified copy of the policy with the

Corporation within ten days of placing the insurance.

4. Waiver of Rights by Mortgagee

The mortgagee of any unit must agree that, subject to The Condominium Property Act,

1993, all proceeds of insurance policies of the Corporation may be used to rebuild the

project, and must waive its rights to have the proceeds applied on account of its

mortgage.

This does not prevent a mortgagee from receiving insurance proceeds if the Corporation

) is satisfied that:

APPENDIX "C" (continued)

(a) the mortgagee's rights are under an additional policy that will not be brought into

contribution with the Corporation's policies;

(b) the mortgagee has no rights to the proceeds of the Corporation's policies;

(c) the mortgagee's rights will not interfere with rebuilding after damage.

[This type of clause, while useful to the condominium corporation and its insurer,

presents difficulties to the mortgagee's solicitor. It is slightly preferable to one that

requires the mortgage itself to contain such a term, as anyone familiar with a financial

institution's attachment to its printed form will realize.]

5. Waiver of Rights by Insurer

The insurer of the Corporation or any owner must waive any subrogation rights against

the Corporation, its manager, agents, employees, unit owners, and any members of the

household or guests of any owner or occupant of a unit, except for arson or fraud.

The insurer of the Corporation or any owner must waive its option to repair, rebuild or

replace if condominium status is terminated under The Condominium Property Act, 1993

after damage by an insured peril.

[Quaere as to whether it is possible to waive the benefit of statutory condition 13 under

section 128 of The Insurance Act.]

6. Damage or Destruction

1. When there has been substantial damage, the owners shall resolve by special

resolution within 90 days to rebuild or not to rebuild.

2. If the decision is to rebuild:

(a) The Board will arrange to rebuild and repair using proceeds of insurance

to do so.

(b) The Board will disburse proceeds of insurance to contractors III

appropriate progress payments.

APPENDIX "C" (continued)

(c) Costs of rebuilding exceeding the proceeds of insurance will be a common

expense.

(d) The Board may assess the unit owners for the excess.

3. If the decision is not to rebuild, the Board may apply on behalf of the owners to

terminate the condominium status or to settle a scheme under The Condominium

Property Act, 1993.

4. If the condominium status is terminated:

(a) Mortgages or charges affecting any unit are deemed to be transferred in

accordance with their existing priorities to the interests of the owners as

tenants in common of the parcel formerly owned by the condominium

corporation;

(b) Proceeds of insurance will be paid to the owners and mortgagees as their interestsmay appear, in proportion to their interests in the parcel.

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