J. Duty to Life Insure Mortgages

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 224-225

Page 224

For many customers, the banking arrangement most frequently entered into after the execution of an account agreement is a lending agreement, in particular, the loan secured by a mortgage with which to purchase a residence. Since mortgagees typically have no other assets beyond their equity in the property purchased, banks require, in most cases, that life insurance be purchased as security against the repayment of the mortgage where there are joint mortgagees in the event that one of them dies before the mortgage is retired. Typically, mortgage insurance ensures repayment of the loan so that the survivor is not obliged to lose a home. Since banks are prohibited from engaging in tied selling, the mortgagees may either buy life insurance on their own from an insurer of their choice that is satisfactory to the bank or the bank will arrange to make application on behalf of the mortgagee to an insurance company, which may be a related entity.²³¹

Where the bank undertakes to make the application, it is under a duty of care to the applicants to procure insurance or to inform them of the rejection of the application.²³²

Failure to do so constitutes negligent misrepresentation, although the bank will not be liable where the customers do not rely on the bank’s failure to inform them that insurance is not in place.²³³

Where a bank fails to make the application without informing the customers, yet collects the premiums but no insurance coverage would have been available for medical reasons, the bank is obliged to retire the mortgage on the death of a joint mortgagee.²³⁴

An insurer is not bound when the application contains a material misrepresentation.²³⁵

Where the customers waive life insurance, there is no liability on the part of the bank and the surviving customer remains

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bound to discharge the mortgage from their own assets in the absence of insurance.²³⁶

When a bank negligently misrepresents the insurance coverage to customers, nominal damages may be awarded when insurance coverage is not available in the market at all²³⁷or substantial damages may be awarded when it is available.²³⁸

When life insurance is cancelled, the bank is obliged to give the customers reasonable notice so that they may make other arrangements.²³⁹

On the other hand, when a bank overlooks mortgage insurance contrary to bank policies, no fiduciary obligation is owed to a customer whose husband dies without insurance, with the result that she will have to...