Fortuity - Canadian Insurance News and Trends - April 2026

The standard mortgage clause drives efficiency in the business of property insurance. It secures a mortgagee’s interest in a property under a contract between the mortgagee and insurer, separate from the contract of insurance between the insurer and mortgagor. The mortgagor’s conduct will not affect the mortgagee’s coverage. This benefits everyone involved in insuring and financing a property.

However, the utility of the standard mortgage clause is undermined when it names the wrong mortgagee: someone other than the actual lender with a mortgage on title or an interest in the property. This was the issue in RSSJ Investments Inc. et al v. Sonnet Insurance Company (Sonnet). In RSSJ, the Ontario Superior Court of Justice refused to strike claims of unnamed mortgagees (RSSJ) under a standard mortgage clause.

The issue in Sonnet was whether RSSJ could claim under the standard mortgage clause when it was not the named a mortgagee in the policy. The Court found that the law in Ontario is unsettled and that the law outside Ontario diverges on whether the standard mortgage clause unambiguously applies only to named mortgagees. In light of the mortgagees’ rectification claim, the Court denied the insurer’s motion to strike the mortgagee’s claim as not being clearly bound to fail.

Background

RSSJ financed and registered a mortgage on a property. Sonnet insured the property under a policy with the mortgagor as insured. However, the policy listed a different mortgagee than RSSJ under the standard mortgage clause. The listed mortgagee had discussed alternative financing with the insured, but ultimately did not provide financing or receive a mortgage.

A fire damaged the property. The insured and RSSJ claimed under the policy with Sonnet. Sonnet denied the insured’s claim and rescinded the policy, alleging the insured made material misrepresentations. Sonnet denied RSSJ’s claim on the basis that RSSJ was not the named mortgagee in the policy and thus had no insured interest in the property.

RSSJ sued Sonnet and claimed in contract under the standard mortgage clause. RSSJ also claimed in the alternative that if it did not have a contract by virtue of not being the named mortgagee, it was entitled to rectification to correct the wrongly named mortgagee. Sonnet moved to strike the claims based on two cases outside Ontario, which found that an unnamed mortgagee could not claim under the standard mortgage clause, whether the clause was read ambiguously or not.

The decision

The Court denied Sonnet’s motion to strike based on the law on standard mortgage clauses in Ontario and the doctrine of rectification. The Court found that the law in Ontario was unsettled on whether an unnamed mortgagee can be covered under a standard mortgage clause. The issue boiled down to whether the phrase “the Mortgagee” in the standard mortgage clause is clear on its face to cover only the named mortgagee, or ambiguous and potentially intended RSSJ as the covered mortgagee. The law is unsettled in Ontario, and there were divergent interpretations of the standard mortgage clause in the cases relied on by Sonnet (reading it ambiguously and unambiguously). Thus, it was not clear that the law precluded RSSJ’s claim.

The Court also emphasized that prior cases were decided on a full evidentiary record showing the insurer either knew the unnamed mortgagee’s identity and expressly refuted an intention to cover them, or did not know their identity at all. This evidence was not available in Sonnet. A full evidentiary record was needed to inform a decision on the merits of RSSJ’s claim.

Most importantly, the Court noted that rectification was not an issue in prior cases. A successful rectification claim would entitle RSSJ to correct a mistake in the policy to reflect the true intentions of the insured and Sonnet, by substituting RSSJ’s name in place of the wrongly named mortgagee. Rectification was a viable claim based on the pleadings. Any issues on the merits required a full evidentiary record. Further, since the rectification claim survived, the contract claim had to survive as well. Both claims were tethered: if rectification was successful and the policy was rectified to substitute RSSJ’s name as mortgagee, that would inform RSSJ’s ability to claim in contract under the standard mortgage clause.

Takeaway

Sonnet raises two issues. The first concerns whether the standard mortgage clause is ambiguous. The second issue is how the doctrine of rectification can affect an unnamed mortgagee’s rights under a standard mortgage clause. The Court’s emphasis in Sonnet on the significance of rectification to a contract claim may signal future treatment of the standard mortgage clause as ambiguous and potentially covering an unnamed mortgagee, depending on the insurer’s knowledge of the mortgagee’s identity.

This is because rectification works by fixing a mistake in a written contract to reflect the parties’ true intention; it can correct a drafting error but not alter the terms of their agreement. Reading the standard mortgage clause unambiguously to only mean the named mortgagee would preclude a court’s ability to apply prior agreements (a necessary element for rectification) outside the policy’s written words, like the named mortgagee. If the phrase “the Mortgagee” unambiguously means the named mortgagee, then prior agreements identifying an unnamed mortgagee could not overwhelm and replace the named mortgagee as written in the policy. To do so would alter the substantive agreement insofar as a counterparty is concerned. An unambiguous reading would seemingly preclude rectification.

The issues in Sonnet must still be decided on their merits, but there are immediate lessons for insurers. Insurers should not assume the naming of a specific mortgagee in a standard mortgage clause will conclusively bar an unnamed mortgagee from claiming coverage. This is especially so if an unnamed mortgagee claims rectification. A claim for rectification may sustain a claim at least through the evidentiary phase of litigation.