Caisse Populaire des deux Rives v. Société Mutuelle d'Assurance Contre l'Incendie de la Vallée du Richelieu

Caisse Populaire des deux Rives v. Société Mutuelle d'Assurance Contre l'Incendie de la Vallée du Richelieu
Collection
Supreme Court Judgments
Date
1990-10-04
Report
[1990] 2 SCR 995
Case number
21205
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley
On appeal from
Quebec
Subjects
Insurance
Notes
SCC Case Information: 21205
Decision Content
Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 995
Le Groupe Estrie‑Richelieu,
Compagnie d'assurance, in continuance
of suit from Vallée du Richelieu, Compagnie
mutuelle d'assurance de dommages Appellant
v.
Caisse populaire des Deux Rives Respondent
indexed as: caisse populaire des deux rives v. société mutuelle d'assurance contre l'incendie de la vallée du richelieu
File No.: 21205.
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 clause -- Intentional fault of insured -- Insurance policy purchased by hypothecary debtor -- Debtor deliberately burning insured property -- Whether intentional fault of debtor can be invoked against hypothecary creditor ‑‑ Legality of hypothecary clause -- Civil Code of Lower Canada, art. 2563.
A farmer obtained a loan from respondent Caisse and hypothecated his property to secure its repayment. The deed of loan provided that the debtor undertook to insure the hypothecated property in respondent's favour, and in fulfilment of this obligation the debtor purchased an insurance policy with appellant. The standard hypothecary clause included in the policy provided that, in the event of loss, the indemnity was payable to respondent and that the acts, neglect, omissions or misrepresentations of owners of the insured property could not be invoked against hypothecary creditors. The insured property was subsequently burnt by the intentional fault of the debtor and appellant, relying on art. 2563 C.C.L.C., refused to indemnify respondent. This article of public order provides that an insurer "is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault". In response to this refusal, respondent brought an action against appellant in the Superior Court. The court allowed the action and its judgment was affirmed by the Court of Appeal. This appeal is to determine whether the intentional fault of a hypothecary debtor can be invoked against his hypothecary creditor under an insurance contract containing a hypothecary clause.
Held: The appeal should be dismissed.
The insurance clause in the hypothecary loan contract contains all the elements of a contract of mandate, under which the hypothecary debtor has undertaken to keep the property subject to the hypothec insured. In accordance with that mandate, the hypothecary debtor took out an insurance policy containing a hypothecary clause. The wording of this clause indicates the existence of a second insurance contract between the hypothecary creditor and the insurer, a contract separate from the one purchased by the hypothecary debtor personally. Since the hypothecary creditor and not the debtor is the insured under this second insurance contract, indemnification of the hypothecary creditor for the loss caused by its debtor's intentional fault is not contrary to the prohibition of public order contained in art. 2563 C.C.L.C. Fault by the hypothecary debtor must be treated as fault by a third party.
Cases Cited
Referred to: Madill v. Lirette, [1987] R.J.Q. 993; Guérin v. Manchester Fire Assurance Co. (1898), 29 S.C.R. 139; Syndicate Ins. Co. v. Bohn, 65 F. 165 (1894); Hallé v. Canadian Indemnity Co., [1937] S.C.R. 368; Aetna Insurance Co. v. Kennedy, 301 U.S. 389 (1937); Federal National Mortgage Association v. Prudential Property and Casualty Insurance Co., 517 So.2d 201 (1987); Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94, rev'g (1901), 3 O.L.R. 127 (C.A. Ont.); London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10; Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141 (1878); London Loan and Savings Co. of Canada v. Union Insurance Co. of Canton Ltd. (1925), 56 O.L.R. 590, aff'd (1925), 57 O.L.R. 651; Royal Insurance Co. of Canada v. Trans Canada Credit Corp. (1983), 1 C.C.L.I. 300; Royal Bank of Canada v. Red River Valley Mutual Insurance Co., [1986] 5 W.W.R. 236; National Bank of Canada v. Co‑Operators General Insurance Co. (1988), 90 A.R. 295; Commerce & Industry Insurance Co. v. West End Investment Co., [1977] 2 S.C.R. 1036; Agen, December 8, 1964, Parfait v. Assurances générales et Nationale incendie (1965), 36 Rev. gén. ass. terr. 333; Cass. civ., February 28, 1939, La Confiance v. Le Phénix (1939), 10 Rev. gén. ass. terr. 469; Cass. civ., December 4, 1946, Consorts Poudenx v. Cie d'assurance La France, D.1947.25.
Statutes and Regulations Cited
Civil Code of Lower Canada, arts. 13, 17(24), 984, 1173, 1174, 1701, 1702, 2468 [repl. 1974, c. 70, s. 2], 2499 [repl. idem], 2500 [repl. idem; am. 1979, c. 33, s. 47], 2563 [repl. 1974, c. 70, s. 2], 2572 [repl. idem], 2573 [repl. idem], 2578 (old), 2582 [repl. 1974, c. 70, s. 2], 2586 [repl. idem].
Insurance Act, R.S.Q. 1964, c. 295, s. 238.
Loi du 13 juillet 1930 relative au contrat d'assurance, J.O., July 18, 1930, ss. 12, 37.
Authors Cited
American Jurisprudence, vol. 43, 2nd ed. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1982.
Appleman, John Alan and Jean Appleman. Insurance Law and Practice, rev. vol. 5A. St. Paul, Minn.: West Publishing Co., 1970.
Bergeron, Jean‑Guy. "L'opposabilité des exceptions à différents intéressés dans un contract d'assurance" (1987), 47 R. du B. 933.
Bigot, Jean. "Assurances de responsabilité: les limites du risque assurable" (1978), 49 Rev. gén. ass. terr. 169.
Civil Code of Lower Canada: Sixth and Seventh Reports and Supplementary Report. Québec: George E. Desbarats, 1865.
Comerford Jr., W. Thompson. "When Is Money Paid the Mortgagee Recoverable? ‑‑ Is the Counterclaim Compulsory?" (1986), 22 Tort & Ins. L.J. 113.
Côté, Pierre‑André. The Interpretation of Legislation in Canada. Cowansville, Qué.: Éditions 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.
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. I, 2e éd., "Assurances terrestres" par Georges Durry.
Fabien, Claude. "Les règles du mandat". Dans Répertoire de droit: Mandat. Montréal: Chambre des notaires du Québec, 1982.
Faribault, Bernard. "Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300.
Lambert‑Faivre, Yvonne. Droit des assurances, 6e éd. Paris: Dalloz, 1988.
Ledru‑Rollin. "Coup d'{oe}il sur les praticiens, les arrêtistes et la jurisprudence". Dans Journal du Palais, t. 1, 3e éd. Par Ledru‑Rollin. Paris: F.‑F. Patris, 1842.
Louisiana Civil Law Treatise, vol. 15. By William Shelby McKenzie and H. Alston Johnson. St. Paul, Minn.: West Publishing Co., 1986.
Picard, Maurice et André Besson, Les assurances terrestres, t. I, 5e éd. Par André Besson. Paris: L.G.D.J., 1982.
Picard, Maurice et André Besson. Traité général des assurances terrestres en droit français, t. 2. Paris: L.G.D.J., 1940.
Québec. Assemblée nationale. Journal des débats, vol. 15, no 82, le 19 novembre 1974, p. 2873.
Québec. Ministère des Institutions financières, Compagnies et Coopératives. Service des assurances. Rapport Faribault, 1957‑60.
Sicot, Lucien et Henri Margeat. Précis de la loi sur le contrat d'assurance, 4e éd. Paris: L.G.D.J., 1962.
Simard Jr., François‑Xavier. "La faute intentionnelle de l'assuré et la clause de garantie hypothécaire" (1987), 21 R.J.T. 335.
Sumien, Paul. Traité théorique et pratique des assurances terrestres des opérations de capitalisation, d'épargne et de crédit différé, 7e éd. Paris: Dalloz, 1957.
Thisdale, Louise. "Quelques innovations législatives en assurance de dommages", [1978] C.P. du N. 1.
APPEAL from a judgment of the Quebec Court of Appeal, [1988] R.J.Q. 2355, [1988] R.D.I. 556, 18 Q.A.C. 44, affirming a judgment of the Superior Court, [1984] C.S. 1180. Appeal dismissed.
François‑Xavier Simard, Jr. and André Desgagné, for the appellant.
Louis Gagné, for the respondent.
//L'Heureux-Dubé J.//
English version of the judgment of the Court delivered by
L'HEUREUX‑DUBÉ J. -- This appeal concerns the appellant insurer and the respondent hypothecary creditor of the purchaser of an insurance policy. The issue is whether the intentional fault of a hypothecary debtor can be invoked against his hypothecary creditor under an insurance contract containing a hypothecary clause.
Facts
The relevant facts are not in dispute and may be summarized as follows:
As security for a loan obtained from the respondent by one Leclerc, a hypothec was placed on certain immovable property. One of the conditions of the deed of loan was that the hypothecary debtor undertake to insure this property. In accordance with this clause, the latter purchased an insurance contract with the appellant. The immovable property insured by the appellant was subsequently burned by the intentional fault of Leclerc, its owner. The insurance contract provided that in the event of loss the indemnity was payable to the respondent, under the hypothecary clause. It was a standard form providing that the acts, neglect, omissions or misrepresentations of owners or occupants of the insured property could not be invoked against hypothecary creditors. The respondent brought an action against the appellant, claiming from it $112,359.50, the amount which it alleged was owed to it on the date of the fire. The Quebec Superior Court ordered the appellant to pay the respondent $62,726.50 with interest and costs, in view of the value of the insured property and the limit of the insurance contract. This judgment was affirmed in all respects by the Quebec Court of Appeal.
Judgments
Superior Court, [1984] C.S. 1180
As the issue raised by the action was whether the insured's intentional fault could be invoked against the hypothecary creditor, Biron J. noted the difficulty arising from the presence of a hypothecary clause in view of the public order provisions of the Civil Code of Lower Canada, following the 1974 amendments (at p. 1182):
[TRANSLATION] There can be no dispute that it [intentional fault of the insured] can be invoked against an ordinary hypothecary creditor who does not have the benefit of the standard hypothecary clause. The question becomes more difficult when, as here, under a clause contained in the policy the insurer has waived the right to rely on the acts of the insured against the hypothecary creditor. The difficulty arises from the second paragraph of art. 2563 of the Civil Code, which provides that the insurer is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault, and from art. 2500 of the Civil Code, which declares any stipulation which derogates from the "prescriptions of . . . the second paragraph of article 2563" C.C. to be without effect.
The court was of the view that the standard hypothecary clause is an integral part of daily practice in insurance matters, and that the interpretation it has always been given by the Quebec courts cannot be set aside without clear wording, and accordingly concluded that arts. 2563 and 2500 C.C.L.C. have not changed the state of the law with respect to the intentional fault of the insured, since they make no specific provision to that effect. Even before the 1974 amendments to the Civil Code of Lower Canada, intentional fault by the insured could be invoked against him by the insurer under the provisions of the Insurance Act, R.S.Q. 1964, c. 295.
The trial judge stated that in his opinion an insurance policy containing a hypothecary clause of the type used in the case at bar sets forth two contracts: one between the purchaser and the insurer, the other between the insurer and the hypothecary creditor. The latter contract is entered into by the hypothecary debtor as a mandatary of his hypothecary creditor. The judge said (at p. 1188):
[TRANSLATION] The Court concludes that the [insurance policy] sets forth a valid insurance contract between the insurer and the Caisse populaire des Deux‑Rives, as there was consent by both parties, that of the Caisse being given by its mandatary, as to the subject‑matter of the contract, namely a guarantee against the risk of fire affecting certain property, and consideration, namely for the insurer, the premium paid and for the insured the guarantee against the risk of fire provided by the insurer.
If there is thus an insurance contract between the Caisse populaire des Deux‑Rives and [the appellant], in this second contract, it is the Caisse which is the insured and not Leclerc.
In the circumstances the fire did not result from the intentional fault of the insured, the Caisse, and as a consequence [the appellant] cannot rely on art. 2563 C.C. to deny liability for the loss to the latter.
The Court accordingly arrives at the same conclusion as if two separate insurance policies had been issued: one in which the insured was the owner of the property and the other in which it was the hypothecary creditor.
On the question of the amount of the indemnity owed to the hypothecary creditor by the insurer, the trial judge noted that the immovable property was hypothecated for an amount well above its insured value, but that clearly the indemnity could not exceed the insurance limit or the amount of damage caused to the burned property, if below the insurance limit. He accordingly allowed the respondent's action for a total of $62,726.50.
Court of Appeal, [1988] R.J.Q. 2355
(Tyndale and Gendreau JJ.A. and Chevalier J. (ad hoc))
Chevalier J. (ad hoc)
Chevalier J., who wrote the main opinion for the court, in which his colleagues concurred with certain qualifications, adopted the Superior Court's analysis regarding the effect of the introduction of art. 2563 C.C.L.C. and arrived at a similar result, that it had not altered the state of the law on whether the intentional fault of the insured could be set up against him. Article 2578 (old) of the C.C.L.C. and s. 238 of the Insurance Act prohibited indemnification for damage caused by the intentional fault of the insured.
Referring to the sources of the present art. 2563 C.C.L.C., namely French civil law, he noted that Quebec insurance law is the product of an intermingling of French law and North American practice, and so there could be no question of blindly following the principles of either one. In his opinion, a choice had to be made between two characterizations of an insurance policy, as a stipulation for a third party in favour of the hypothecary creditor or as an independent second insurance contract between the hypothecary creditor and the insurer. The court adopted the second solution, for four separate reasons:
1. The text of art. 2468 C.C.L.C., which defines a contract of insurance, is not in any way incompatible with the existence of a separate second contract;
2. The general scheme of the Civil Code of Lower Canada and insurance law is not disrupted if the hypothecary creditor, as an insured, benefits from the fault of his debtor: though it is contrary to public policy for the insured to benefit from his own fault, it is quite acceptable for a third party to do so;
3. Under arts. 2468 and 2563 C.C.L.C., the policyholder is not necessarily the insured, who himself will not necessarily be the purchaser, but may simply be the holder of an insurable interest; the policyholder may accordingly purchase a policy evidencing two insurance contracts with two separate insured parties;
4. The wording of the hypothecary guarantee suggests the creation of a separate insurance contract rather than the mere stipulation for a third party, in view of the mutual rights and obligations it contains between the insurer and the hypothecary creditor.
Moving on to an analysis of Quebec decisions on point, the judge cited the following passage from the reasons of Vallerand J.A., dissenting but not on this point, in Madill v. Lirette, [1987] R.J.Q. 993, at p. 1006 (at pp. 2364‑65):
[TRANSLATION] I do not think anyone will dispute that the hypothecary creditor may, by a separate policy, insure his debt and insure it against any intentional fault, whether by the owner or a third party. No one will argue either that in such a case it is not possible to invoke against someone who is unquestionably an insured, but not the person who committed the intentional fault, such intentional fault committed by another insured covered by another policy. This means that regardless of the public order prohibition in art. 2563 the hypothecary creditor can legitimately shield his interest from the owner's intentional fault and thus, by a circuitous man{oe}uvre, defeat a provision of public order. That being the case, the outcome can hardly be different depending on whether he is insured in the same policy or in a separate policy. There is absolutely no authority for such a conclusion apart from a finicky interpretation and application of art. 2563.
Finally, Chevalier J. concluded this lengthy analysis as follows (at pp. 2365‑66):
[TRANSLATION] In discussing scholarly analysis, the trial judge cited three writers, two of whom were of the opinion that the owner's intentional fault could not be invoked against the hypothecary creditor, while the third "tended", to use the term from the judgment a quo, to the contrary view . . . . I readily recognize that there is no unanimity among those who have examined in depth a matter which is likely to arise again frequently in our courts of law.
For these reasons, I consider that the judgment a quo is well founded and I would dismiss the appeal with costs.
Gendreau J.A.
Gendreau J.A. added certain qualifications, in particular regarding Madill v. Lirette, supra, where he was among those hearing the case (at pp. 2356‑57):
[TRANSLATION] My colleague very properly observed that the majority in Madill did not reject the argument that the insurance policy "(. . .) as it contains a hypothecary guarantee clause, may actually be two policies, one in which the insured is the beneficiary and the other in which the hypothecary creditor is the beneficiary" [Bisson J.A., at p. 1003] . . .
. . .
Like my colleague, for the reasons given by him and in particular the fact that the insurer has separately and formally undertaken an obligation to the hypothecary creditor, I would give full effect to the hypothecary guarantee clause in the insurance contract, subject to the reservation already mentioned of the formation of a contract between the policyholder and the insurer.
Analysis
In matters of insurance, as in other areas of the civil law, the principle of freedom of contract applies, and in general therefore it is for the parties to an insurance contract to define the limits of the risk covered and the conditions under which the indemnity is payable. However, this freedom of contract is not unlimited and will be subject to the public order provisions of the Civil Code of Lower Canada.
Bearing in mind this general principle, a two‑step approach should be adopted in analyzing the problem raised in this appeal, namely the examination of first the insurance contract, and second its compliance with the public order provisions of the Civil Code of Lower Canada, and in particular art. 2563.
1. Preliminary Observations
Before proceeding with the analysis as such, some general observations should be made regarding the supplementary sources of law in Quebec insurance law, especially as the parties raised this point both in their oral argument and in their factums, one pointing to the French origin of art. 2563 C.C.L.C. and the other to the American origin of the hypothecary clause in question.
In the past, writers and courts have tended to look to foreign insurance law for answers to questions for which Quebec civil law did not seem to provide a solution. This broader view of the sources of law is partly a result of the nature of insurance law, which the codifiers noted in their Seventh Report, is a body of fundamental rules found in several countries:
Indeed, notwithstanding the difficulty arising from certain questions, most of the great fundamental rules are well settled, and they are nearly uniform in all commercial states. The chief embarrassment therefore felt in dealing with the subject, lies, not in the statement of principles, but the task of arrangement, and in that of selecting amid conflicting opinions in matters of detail.
(Civil Code of Lower Canada: Sixth and Seventh Reports and Supplementary Report (1865), at p. 240.)
However, this apparent similarity of the fundamental rules should not cause us to forget that the courts have a duty to ensure that insurance law develops in a manner consistent with the rest of Quebec civil law, of which it forms a part. Accordingly, while the judgments of foreign jurisdictions, in particular Britain, the United States and France, may be of interest when the law there is based on similar principles, the fact remains that Quebec civil law is rooted in concepts peculiar to it, and while it may be necessary to refer to foreign law in some cases, the courts should only adopt what is consistent with the general scheme of Quebec law.
However, the development of insurance law must necessarily take place within its own particular socio‑economic context, namely North American insurance practice. In this regard Faribault notes ("Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300, at p. 308):
[TRANSLATION] Without arguing for the introduction into our law of North American solutions to insurance problems, it is worth bearing in mind that our legislature has drawn inspiration from the "genius of the French language" and "North American practice" in the matter, so that Quebec insurers may develop a competitive industry in the North American context.
In short, as Ledru‑Rollin writes, the problem is [TRANSLATION] "to narrow if possible the connection between theory and practice, two sides of an indivisible entity, the law" ("Coup d'{oe}il sur les praticiens, les arrêtistes et la jurisprudence", Journal du Palais (3rd ed. 1842), vol. 1, at p. xix).
2. Interpretation of the Hypothecary Clause
The appellant and the respondent put forward two different interpretations of the hypothecary clause. In the appellant's submission, the hypothecary clause is part of the insurance contract purchased by the hypothecary creditor's debtor. The clause is thus a stipulation for a third party of the right to the insurance indemnity, under which all defenses the insurer can invoke against the hypothecary debtor may be set up against the hypothecary creditor. In the respondent's submission, the hypothecary clause is actually a second contract between the insurer and the hypothecary creditor, a contract which is separate and apart from that purchased by the hypothecary debtor. This second contract would then have been purchased from the insurer by the hypothecary debtor as mandatary for his hypothecary creditor. It follows, the respondent argues, that the completely independent contractual link means that the fault of the hypothecary debtor cannot be invoked against his creditor. I am of the view, for the reasons which follow, that we have to recognize that the latter interpretation more adequately reflects the intent expressed by the parties to the insurance contract and is consistent with the general scheme of insurance law as it is practised in North America, as well as being in keeping with the rules of Quebec civil law as a whole.
A. The Insurance Clause: a Contract of Mandate
Under the loan contract made between the respondent and Leclerc, the latter undertook to maintain insurance on the property which was the subject of the collateral guarantee, consisting primarily of a hypothec on his property. The insurance clause in the contract reads as follows:
[TRANSLATION] 9 -- INSURANCE
For the duration of this loan the borrower undertakes to insure the hypothecated buildings against loss and damage resulting from fire and the other risks mentioned in the supplementary coverage rider, to the satisfaction of the Office and for the benefit of the lender, and to transfer to the latter and deliver to him without delay all policies and certificates of insurance issued to this effect and receipts certifying renewal fifteen days before each policy or certificate expires.
In the event that the borrower does not perform the foregoing obligations, the lender may have the said buildings insured to its satisfaction and at the borrower's expense. Any premiums paid by the lender for this purpose shall be immediately payable, without prejudice to its right to add it to its next semi‑annual instalment.
Notwithstanding the second paragraph, in the event of default by the borrower, the Office may to its satisfaction and at the request of the lender cause the said property to be insured at the borrower's expense. Any premiums paid by the Office for this purpose shall be payable by the lender and, after payment of the premium to the Office, the lender may forthwith claim reimbursement, without prejudice to its right to add the premium to the next semi‑annual instalment.
In the event of loss the lender shall collect the indemnity directly from the insurers up to the amount of what is owed to it, such indemnity being deposited with the lender, which with the permission of the Office shall be entitled to allocate it in whole or in part either in accordance with s. 33 of the regulations or to the payment, in whole or in part, of the cost of rebuilding or repairing the hypothecated buildings, without in the latter case the privileges, hypothecs or other rights of the lender being reduced or affected in any way as a consequence of receipt of the indemnity.
The borrower shall report any loss to the lender and the Office forthwith and shall not undertake any rebuilding or repair of destroyed or damaged buildings without the prior written consent of the lender and the Office. [Emphasis added.]
The reference to the "Office" in this clause is to the Office du crédit agricole du Québec, and the "regulations" mentioned are, under clause 3 of the hypothecary loan deed, the regulations respecting the Farm Credit Act, R.S.Q. 1964, c. 108.
Mandate is governed by Title Eight of the Civil Code of Lower Canada, "Of Mandate", which contains inter alia its definition in art. 1701:
1701. Mandate is a contract by which a person, called the mandator, commits a lawful business to the management of another, called the mandatary, who by his acceptance obliges himself to perform it.
The acceptance may be implied from the acts of the mandatary, and in some cases from his silence.
The substantive and formal requirements of a mandate are minimal. Where there are two adults capable of consenting who agree that one of them, the mandatary, shall perform a legal act with a third party on the mandator's behalf, it can be concluded that there is an implied contract of mandate. As Professor Fabien observes, [TRANSLATION] "The keynote in the contract of mandate is freedom: freedom of use, freedom of stipulation and freedom of form" ("Les règles du mandat", in R.D. ‑‑ Mandat ‑‑ Doctrine ‑‑ Document 1, at p. 103, No. 64). Further, unless there is an agreement or usage to the contrary, mandate will be presumed to be gratuitous (art. 1702 C.C.L.C.).
On reviewing the insurance clause cited above, we find that it is an undertaking between two different persons with capacity to contract. One party, the borrower, undertakes to perform a legal act, a contract of insurance, with a separate third party, the insurer. This legal act is to be performed by the borrower [TRANSLATION] "for the benefit of the lender" (paragraph 1 of the insurance clause), so that it is clear that it is the lender's interests which the insurance contract is designed to protect, and therefore that the borrower must act as a representative of the latter's interests. We thus have the basic elements of the contract of mandate, complemented by other elements of the hypothecary clause, providing in detail for certain aspects of the performance of the mandate: first, the insurance clause imposes two specific additional obligations on the borrower, that of informing the lender and the Office promptly of any loss, an obligation that would have little meaning if the borrower has a unilateral obligation to insure himself personally, and that of delivering the policies and renewals to the hypothecary creditor without delay, which once again seems entirely consistent with a contract of mandate. Finally, the insurance clause provides a penalty for non‑performance of the mandate, namely the purchase of an insurance policy by the lender or the Office at the borrower's expense: Bergeron, "L'opposabilité des exceptions à différents intéressés dans un contrat d'assurance" (1987), 47 R. du B. 933, at p. 982.
Though the insurance clause provides the basis for a mandate, it does not by itself establish that the latter exists. The borrower could comply with it by means other than a hypothecary clause, which, as it contains a separate contract between the insurer and the hypothecary creditor, implies or presupposes the latter's consent and thus a mandate to conclude this separate contract given to the borrower by the lender. It does not necessarily follow, however, that the hypothecary clause contains a contract of insurance between the hypothecary creditor and the insurer. The hypothecary debtor must still have purchased this insurance in accordance with his mandate, that is, by means of a separate insurance contract in which he was acting only as a representative of the hypothecary creditor.
B. The Hypothecary Clause: a Separate Insurance Contract
The hypothecary clause in the insurance policy obtained by the hypothecary debtor, and in which the respondent contended there was a second insurance contract, repeats the standard formula approved by the Insurance Bureau of Canada and used in a great many insurance policies both in Quebec and in other Canadian provinces. This clause reads as follows:
[TRANSLATION] 8. STANDARD MORTGAGE CLAUSE (approved by The Insurance Bureau of Canada)
(a) Breach of conditions by mortgagor, owner or occupant
It is hereby provided and agreed that:
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, transfer of interest, any vacancy or non‑occupancy, or the aggravation of the declared risks.
PROVIDED ALWAYS that the Mortgagee shall notify forthwith the Insurer 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.
(b) 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.
(c) 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.
(d) Who may give proof of loss
The Mortgagee may give notice of loss or deliver the required Proof of Loss under the policy upon becoming aware of the loss.
(e) 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, 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.
(f) 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 and/or assigns. [Emphasis added.]
This clause is derived from the standard or "New York Union" mortgage clause, which appeared in the State of New York around the mid‑1870s: Guérin v. Manchester Fire Assurance Co. (1898), 29 S.C.R. 139, at p. 162, per Gwynne J., and Syndicate Ins. Co. v. Bohn, 65 F. 165 (8th Cir. 1894), at pp. 174-75, per Sanborn Cir. J. for the court. This clause was necessary since without it the hypothecary creditor had no right to the proceeds of the insurance covering the property protected by it: Thisdale, "Quelques innovations législatives en assurance de dommages", [1978] C.P. du N. 1, at pp. 29, No. 101. It should be noted that the Quebec legislature corrected this deficiency in the 1974 insurance law amendments, with the introduction of art. 2586 C.C.L.C., the first paragraph of which gives preferred creditors priority over the proceeds of insurance policies:
2586. The indemnities exigible are apportioned among the creditors having hypothecs or privileges on the property damaged, according to their rank and without express delegation, upon mere notice and proof by them.
However, this provision confers a right to indemnification on the hypothecary creditor only to the extent the insured, here the hypothecary debtor in a purely personal insurance contract, is himself entitled to it: Madill v. Lirette, supra, at p. 1003, per Bisson J.A. for the majority. Under this legal subrogation, therefore, the hypothecary debtor's intentional fault may be invoked against the hypothecary creditor. As fault can be opposed in this way, the protection given the hypothecary creditor by art. 2586 C.C.L.C. remains incomplete, and the hypothecary clause may thus have an important effect in protecting the rights of the hypothecary creditor. This clause must accordingly be analyzed to determine its nature and effects.
The nature of the hypothecary clause must be examined in light of the constituent elements of an insurance contract. These elements are set out in art. 984 C.C.L.C., dealing with the formation of contracts in general, and art. 2468 C.C.L.C., defining the insurance contract:
984. There are four requisites to the validity of a contract:
Parties legally capable of contracting;
Their consent legally given;
Something which forms the object of the contract;
A lawful cause or consideration.
2468. A contract of insurance is that whereby the insurer undertakes, for a premium or assessment, to make a payment to a policyholder or a third person if an event that is the object of a risk occurs.
It is only if the hypothecary clause can be interpreted as including all these elements that it may be characterized as an insurance contract between the hypothecary creditor and the insurer. It should be noted at the outset that the fact that the hypothecary debtor took out the policy and paid the insurance premiums is in no way a bar to such a characterization. As Rinfret J. observed for the Court in Hallé v. Canadian Indemnity Co., [1937] S.C.R. 368, at p. 375, after citing the text of art. 2468 C.C.L.C.:
There is nothing in the definition of the code to the effect that the person "called the insured" must be the person who applies for the policy or who pays the premium.
In the article just quoted, we see nothing to prevent a person requesting the issue of an insurance policy for the benefit of another person. And there is nothing to that effect in any other article of the code.
It is thus necessary to examine the actual wording of the hypothecary clause to determine whether it contains the components of a separate contract. In the event of ambiguity, this clause, like any insurance contract, must be interpreted in the insured's favour (art. 2499 C.C.L.C.).
(i) Separate Object
Upon examination of the hypothecary clause, it can be seen that several distinct rights and obligations are assigned to both the hypothecary creditor and the insurer. First, one should note that under the second paragraph of subclause (a) of the clause, the hypothecary creditor is required to inform the insurer of any increased risk. This specific obligation imposed on the hypothecary creditor may be contrasted with the simple right of any interested person to inform the insurer, set out in arts. 2572, para. 2, and 2573 in fine C.C.L.C.:
2572. The insured must notify the insurer of any loss of such a nature as to involve coverage, as soon as he becomes aware of it.
Any interested person may give such notification.
2573. At the request of the insurer, the insured must notify the insurer as soon as possible of all the circumstances surrounding the loss, including its probable cause, the nature and extent of the damage, the site of the property, the rights of third persons affecting it, and any concurrent insurance.
. . .
If the insured fails to comply with the obligations of this article, any interested person may do so in his place. [Emphasis added.]
Further, the coverage provided by the hypothecary clause takes in a broader range of risks than the coverage contained in the insurance contract with the hypothecary debtor. The hypothecary creditor is entitled to the insurance indemnity whenever his debtor would have been entitled to it, but the indemnity may also be claimed in cases where the latter has lost this right on account of his "acts, neglect, omissions or misrepresentations". This extended coverage is also illustrated by the subrogation of the insurer in the rights of the hypothecary creditor against the hypothecary debtor, applicable in situations where the indemnity would not have been due to the debtor under his contract. Professor Bergeron quite properly observes that it necessarily follows from this greater protection that the hypothecary clause is a separate contract (at pp. 979-80):
[TRANSLATION] There can be no doubt that the hypothecary creditor has different rights than the debtor: under this clause, these rights are separate and go beyond those of the debtor; the creditor may be paid in certain circumstances in which the insured debtor would not be entitled to receive the indemnity; this is so tr