The concept of insurable interest forms part of the precontractual aspects of the policy, in that it is essential to the very existence of the policy. Without an insurable interest, the policy simply cannot exist.

It is precisely in the field of hypothecary claims and taking-in-payment that an aspect of insurable interest stood out most clearly. A hypothecary creditor that claims an indemnity based on the hypothecary endorsement must establish its interest on the day of the loss as well as the amount of the indemnity payable, which will be limited to the amounts owing on that date. However, what are the hypothecary creditor’s rights in the insurance indemnity when the building is destroyed by fire while the hypothecary debtor is in default and the creditor has commenced enforcement proceedings against the property?

This question was addressed by the Hon. Patrick Buccholz in Services financiers GEB inc. c. Aviva, compagnie d’assurance du Canada[1]. In this case the defendants, damage insurance companies, sought complete dismissal of the action brought against them by the plaintiff. Said plaintiff is a hypothecary creditor which became the owner of a building partially destroyed by fire for which the insurance had been taken out by its hypothecary debtor, namely the initial owner of the building.

The timeline of the events needs to be looked at in order to understand the judgment analyzed below:

1. June 12, 2019: Loan agreement and deed of hypothec
2. October 11, 2019: Publication of the prior notice of exercise of the hypothecary right of taking-in-payment
3. October 22, 2018: Signature of a deed of voluntary surrender and taking-in-payment between the debtors and the plaintiff
4. October 28, 2019: A fire partially damages the building
5. October 28, 2019: The plaintiff reports the loss to the defendants

The 60-day surrender period

From the outset, the defendants contended that the plaintiff, having agreed to accept the voluntary surrender of the property in payment of its loan prior to the date of the loss, can in no way sue them in that regard, given the lack of an insurable interest at the time of the fire. Thus, in the defendants’ view, the voluntary surrender of October 22, 2019 would have put an end to the insurance because of the plaintiff’s lack of an insurable interest.

The Court was not convinced of this.

Article 2484 of the Civil Code of Québec (C.C.Q.) provides that an insurable interest is necessary for insurance to be valid. In this case, the deed of voluntary surrender, which was signed by the debtors and the plaintiff, clearly states that the plaintiff has received full payment of the loan and that it is the owner of the property. However, the surrender occurred within the 60-day period provided for in article 2758 C.C.Q., and a creditor cannot exercise its recourse within that period because of article 2749 C.C.Q., which is of public order:

“2749. Creditors may not exercise their hypothecary rights before the period determined in article 2758 for surrender of the property has expired.”

Since an immovable property cannot be transferred to the creditor by voluntary surrender before the expiry of the period[2], it follows that the plaintiff was not yet validly the owner of the immovable property in question at the time of the loss and its hypothecary claim was not perfectly extinguished, notwithstanding the terms of the deed of voluntary surrender. It is only upon the expiry of the period determined for the surrender of the immovable property that the creditor automatically and immediately becomes the owner[3], if no one has cured the default or paid the creditor[4], or if no one has asked for the abandonment of the taking-in-payment[5]. Contrary to the defendants’ contentions, the plaintiff could not be the owner before the expiry of the period of 60 days referred to in articles 2749 and 2758 of the Civil code of Québec, i.e., December 11, 2019.

The plaintiff’s different interests

Meanwhile, even if the plaintiff were the owner of the immovable property, it did not thereupon lose an insurable interest in the insured building. Its status, in fact and in law, changed from that of hypothecary creditor to that of owner, and this in respect of the same immovable property. Article 2481 C.C.Q. expressly states that a person’s insurable interest can change over time:

“2481.  A person has an insurable interest in property where the loss of the property may cause him direct and immediate injury.

It is necessary that the insurable interest exist at the time of the loss but not necessary that the same interest have existed throughout the duration of the contract.”

Moreover, a hypothecary security clause, like the one contained in the insurance contract in this case, establishes important rights which can distinctly benefit the hypothecary creditor in certain circumstances. Under clause A) 6) of form R1 of the contract titled [Translation] Corporate Insurance, Insurance Contract, Renewal (hereinafter the “Insurance Contract”) the defendants undertook to pay the insurance indemnity to the hypothecary creditor, even if it acquired the ownership of the property.

Separate contracts

Furthermore, the guarantees formulated in favour of hypothecary creditors in such clauses have a separate existence which does not necessarily depend on the rights of the insured owner. The hypothecary creditor benefits from a separate insurance contract with the insurer which grants it the same rights as the insured has[6].

It may indeed seem odd that a new owner of the property could benefit from the insurance of the previous owner; however, a hypothecary creditor that takes the property in payment is not an ordinary subsequent purchaser. It has a separate insurance contract. The insurer acknowledges its existence from the start and guarantees it the benefit of the insurance following the transfer of ownership. Therefore the plaintiff had a separate contract with the defendants, which specifically provided that it could benefit from the insurance upon any hypothecary realization.

Accordingly, it must be concluded that, at all relevant times in the matter, the plaintiff held an insurable interest in the insured property. For the time being, its action is not patently ill founded and abuse has therefore not been demonstrated.

 

[1] 2022 QCCS 3074

[2] Québec (Sous-ministre du Revenu) c. Industrielle-Alliance (L’), compagnie d’assurances sur la vie,

[2003] R.D.F.Q. 11, [2003] R.D.I. 261 (rés.), at paras 45-52. See also: Pratte, Denise, Priorités et

hypothèques, 5e éd., Sherbrooke, Éditions Revue de droit, Université de Sherbrooke, 2021, p. 397.

[3] Article 2781 C.C.Q.

[4] Article 2761 C.C.Q.

[5] Article 2779 C.C.Q.

[6] Caisse populaire des Deux Rives v. Société Mutuelle d’Assurance Contre l’Incendie de la Vallée du

Richelieu, [1990] 2 S.C.R. 995, at pp. 1013-1015, 1025, 1028.