Mandatory Home Insurance for Your Mortgage | Canada Guide

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Maintaining adequate home insurance is a fundamental obligation of every mortgage borrower in Canada. The mortgage contract invariably requires the borrower to obtain and maintain a home insurance policy covering at minimum the reconstruction value of the property for the entire duration of the loan. This requirement protects both the lender and the borrower: in the event of a major loss such as fire, flood, or storm, insurance ensures the property can be rebuilt or repaired, thereby preserving the value of the mortgage collateral. In Quebec, the borrower has the freedom to choose their insurer and coverage level, provided the policy meets the lender's minimum requirements. The lender must be named as mortgage creditor (or priority beneficiary) on the policy, which guarantees they will be notified in case of cancellation or modification of coverage. If the borrower fails to maintain the required insurance, the lender has the right to obtain forced-placed insurance at the borrower's expense, generally at a cost significantly higher than voluntarily purchased market insurance.

Home Insurance: An Essential Mortgage Obligation

Among a mortgage borrower's obligations, maintaining adequate home insurance is one of the most fundamental. This requirement appears in all mortgage contracts in Canada and serves a dual purpose: protecting the property value that constitutes the lender's collateral, and ensuring the borrower can rebuild or repair their residence in the event of a major loss. Neglecting this obligation can lead to serious financial consequences.

Lender Insurance Requirements

Minimum coverage: the policy must cover at minimum the reconstruction value of the property. This amount represents the estimated cost to completely rebuild the structure and may differ from the market value.
Mortgage creditor designation: the lender must be named as mortgage creditor (or first beneficiary) on the policy, ensuring their right to the insurance proceeds in case of a claim.
Continuous coverage: insurance must be maintained without interruption for the entire duration of the mortgage, from initial disbursement to full repayment.
Notice to lender: the insurer is required to notify the lender in case of cancellation, non-renewal, or substantial modification of the policy.

Consequences of Insurance Default

If the borrower fails to maintain the required home insurance, the lender has significant contractual remedies. The most common is forced-placed insurance, where the lender obtains a policy at the borrower's expense. This forced-placed insurance typically costs two to three times the price of standard insurance and generally offers limited coverage that primarily protects the lender's interests. In extreme cases, persistent failure to maintain insurance can constitute a breach of the mortgage contract sufficient to trigger a demand for full repayment.

Types of Coverage to Consider

Comprehensive coverage (broad form): Covers all risks except those specifically excluded in the policy. This is the most complete coverage and the one generally recommended for homeowners with a mortgage.
Named perils coverage (basic form): Only covers risks explicitly named in the policy (fire, theft, vandalism, etc.). Less expensive but less protective. Verify that this coverage level satisfies your lender's minimum requirements.
Additional endorsements: Extra protections can be added for specific risks such as sewer backup, earthquakes, or groundwater damage. In Quebec, overland flooding is generally not covered by standard policies.

Forced-placed insurance: Home insurance obtained by the mortgage lender on behalf of and at the expense of the borrower when the borrower fails to maintain the coverage required by the mortgage contract. This insurance is generally much more expensive than voluntarily purchased insurance and offers limited coverage, primarily protecting the lender's interests rather than the borrower's.

Frequently Asked Questions

Why is home insurance mandatory with a mortgage?

Home insurance protects the lender's collateral. Your property serves as security for the mortgage loan, and in case of destruction (fire, natural disaster), the lender would risk losing their security. Insurance ensures that funds for reconstruction will be available, protecting both your investment and the lender's collateral.

What amount of coverage does my lender require?

The lender generally requires minimum coverage corresponding to the property's reconstruction value (not its market value). The reconstruction value represents the cost to rebuild the structure from scratch in case of total loss. Your insurer can assess this amount, which may differ significantly from the property's market value.

What happens if I let my home insurance expire?

If your insurance expires or is cancelled, the lender will be automatically notified since they are named as mortgage creditor on the policy. The lender will send you a notice requesting that you reinstate coverage. If you fail to act, the lender can obtain forced-placed insurance at your expense, often at a cost two to three times higher than standard insurance.

Can I choose my own home insurer?

Yes. The lender cannot impose a specific insurer on you. You are free to shop around and choose the insurer of your choice, provided the policy meets the lender's minimum coverage requirements and the lender is named as mortgage creditor on the policy.

Does mortgage insurance (CMHC) replace home insurance?

No, these are two completely different products. Mortgage insurance (CMHC, Sagen, or Canada Guaranty) protects the lender in case of borrower default. Home insurance protects the physical property against loss. Both are required simultaneously when mortgage insurance applies.