The Mortgage Instructions Toolkit provides practical guidance for lawyers responding to lender requests in residential real estate transactions. This page addresses insurance.

The situation

INSURANCE DOCUMENTS

Lawyers rarely receive a full insurance policy in advance of closing. They are more likely to receive a certificate or binder (which may indicate that the policy or coverage in favour of the lender will come into effect on closing, subject to payment of the premium). The standard of practice is to rely on the certificate or binder provided by the insurer, broker, or borrower.

It is possible that after a certificate or binder has been issued, and the premium is tendered, the insurer prematurely terminates coverage after giving any required notice of cancellation.

When there is an existing policy in place, the borrower or insurance broker may simply provide the declaration pages of the current policy reflecting the existing coverage, which may not include the proposed lender. In that case, a certificate of insurance is needed before closing to reflect that the lender is the mortgagee/loss payee.

Replacement cost

Lawyers are not qualified to determine the replacement cost of a building. They should leave the determination of replacement cost to others, and should not assume responsibility for the value selected. 

For residential insurance policies, insurance brokers typically provide suggested replacement cost values to property owners. Unless the policy is a guaranteed replacement cost policy and not simply a replacement cost one, the coverage will only be covered up to the specified replacement cost in the policy regardless of the actual replacement cost.

To determine the appropriate limit for replacement cost coverage in a policy, a qualified expert must be engaged to estimate, for example, the costs of demolition, replacing the demolished building, and bringing the insured building up to current code. The quality of these estimates vary, and much depends on factors like the cause of damage (covered, uncovered, or limited coverage), the extent of the deductible, and the cost of permits, the cost of labour and materials (at the time damage occurs).

Sample lender instructions

… ensure that the policy contains the Insurance Bureau of Canada standard mortgagee clause with the Mortgagee being first loss payee, or verify that fire insurance and extended coverage for not less than the full value, unless otherwise specified, is in force and that the mortgage clause of the Insurance Bureau of Canada is included in the policy, and arrange for loss to be payable to, or ensure that either a fire and extended risks or all risks insurance policy is in effect for the buildings and improvements on the Mortgaged Property in an amount not less than the amount of the Mortgage or full replacement cost value of the buildings and improvements, whichever is lesser, with the loss payable to…

Practice Guidance

When describing that insurance coverage is in effect, you need to make it clear that your statement is based solely on the content of the certificate or other insurance document.

You should not give an opinion or provide any assurance to a lender that:

• An insurance document is genuine.
• Insurance is in effect (or the status of insurance) after the date of the certificate, declaration, or binder.
• The issuing agent had authority to issue the certificate, declaration, or binder.
• The premium has been paid (unless paid by you at the time of closing).
• The coverage as set is sufficient.
• There is a standard mortgagee clause (unless you have actually reviewed the policy and confirmed that the policy is in effect at the time of closing).

Communications to the lender

• Confirm that you have reviewed the insurance document.
• Identify the insurance document and make it clear that the information you are providing is based solely on the contents of the insurance document and on personal knowledge - for example, when you remitted payment or the premium at closing.
• Do not give an opinion that coverage is sufficient.
• Do not confirm that the policy contains specific clauses unless you have read the policy and understand insurance contracts.
• Do not confirm that the policy is in effect.

Communications to the borrower client

• Confirm and document that the borrower understands the risks.

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