Jun 01, 2002

Mortgage Loan - Life Insurance Unavailable On Renewal; Liability Of Mortgage Company #348


By Gerry Neely

It is a common practice for a mortgage lender to offer to sell homeowners life insurance sufficient to pay the principal amount of the mortgage outstanding upon the death of one of them. The difficulty of that death for the survivor is compounded when the insurer denies liability.

This issue was discussed in Legally Speaking 193 in the case of a couple who had insured a five-year term mortgage, which they renewed for three consecutive five-year periods. The couple had to complete a new application for insurance at each renewal and, by the third renewal, the husband had been diagnosed with cancer. As a result of a misunderstanding of the time periods expressed in the application, the husband innocently represented that he had not been diagnosed with cancer. The insurer refused to pay, stating that the insurance would not have been renewed if the application had been correctly answered.

A somewhat similar case tried in 2001 reached a different result to the benefit of the surviving spouse. A couple insured their lives to cover the repayment of a mortgage with a term of 12 months. They were unable to get insurance when they applied to renew the term because the wife had been diagnosed with cancer. The mortgage fell into arrears, the lender foreclosed and then sued the husband for a deficiency of approximately $144,000.

The husband's defence was that the mortgage company representative had failed to clearly inform them of the important provisions of the insurance policy they purchased. Although the representative discussed longer terms for the repayment of the mortgage, he did not make them aware that if they chose a 12-month term they would have to reapply and requalify for insurance.

They were denied the opportunity of considering other alternatives, such as a longer term, whole life insurance or another mortgage company, because they were not made aware that the wife's cancer would disqualify them. While the judge accepted this defence, he found the husband to be contributorily negligent for failing to ask questions or read the insurance policy. That meant that the husband had to pay 50 per cent of the mortgage company's claim. 1

 1.Avco Financial Services Realty Ltd. v. Norman, 45 R.P.R. (3rd), 117.

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